nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒10‒28
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. Coordination and Lock-In: Competition with Switching Costs and Network Effects By Farrell, Joseph; Klemperer, Paul
  2. Firms Merge in Response to Constraints By Boone, Jan
  3. Limits of Acquisition in Price Competing Industry By Grigory Kosenok
  4. Upstream Competition and Downstream Buyer Power By Smith, Howard; Thanassoulis, John
  5. The Comparative Statics of Collusion Models By Kühn, Kai-Uwe; Rimler, Michael S
  6. Buyer Power and Quality Improvements By Battigalli, Pierpaulo; Fumagalli, Chiara; Polo, Michele
  7. Exclusive Quality By Argenton, Cédric
  8. Alliances and industry analysis By Garcia-Pont, Carlos
  9. Merger Simulations of Unilateral Effects : What Can We Learn from the UK Brewing Industry? By Slade, Margaret E.
  10. Computing Abuse Related Damages in the Case of New Entry: An Illustration for the Directory Enquiry Services Market By Martinez Granado, Maite; Siotis, Georges
  11. Non-Parametric Analysis of Efficiency Gains from Bank Mergers in India By Adrian R. Gourlay; Geetha Ravishankar; Tom Weyman-Jones
  12. On the explanation of horizontal, vertical and cross-sector R&D partnerships – evidence for the German industrial sector By Uschi Backes-Gellner; Frank Maass; Arndt Werner
  13. When Anti-Dumping Measures Lead to Increased Market Power: A Case Study of the European Salmon Market By Asche, Frank; Steen, Frode
  14. Home Market Effect, regulation costs and heterogeneous firms. By Toshihiro Okubo; Vincent Rebeyrol
  15. Leniency and Whistleblowers in Antitrust By Spagnolo, Giancarlo
  16. Intellectual Property Rights and Entry into a Foreign Market: FDI vs Joint Ventures By Leahy, Dermot; Naghavi, Alireza
  17. Competition, Innovation and Growth with Limited Commitment By Marimon, Ramon; Quadrini, Vincenzo
  18. Public Markets Tailored for the Cartel- Favoritism in Procurement Auctions By Ariane Lambert Mogiliansky; Grigory Kosenok
  19. Parallel Imports and Price Controls By Grossman, Gene; Lai, Edwin

  1. By: Farrell, Joseph; Klemperer, Paul
    Abstract: Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in efficiency, and gives vendors lucrative ex post market power - over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects. Firms compete ex ante for this ex post power, using penetration pricing, introductory offers, and price wars. Such 'competition for the market' or 'life-cycle competition' can adequately replace ordinary compatible competition, and can even be fiercer than compatible competition by weakening differentiation. More often, however, incompatible competition not only involves direct efficiency losses but also softens competition and magnifies incumbency advantages. With network effects, established firms have little incentive to offer better deals when buyers’ and complementors’ expectations hinge on non-efficiency factors (especially history such as past market shares), and although competition between incompatible networks is initially unstable and sensitive to competitive offers and random events, it later 'tips' to monopoly, after which entry is hard, often even too hard given incompatibility. And while switching costs can encourage small-scale entry, they discourage sellers from raiding one another’s existing customers, and so also discourage more aggressive entry. Because of these competitive effects, even inefficient incompatible competition is often more profitable than compatible competition, especially for dominant firms with installed-base or expectational advantages. Thus firms probably seek incompatibility too often. We therefore favour thoughtfully pro-compatibility public policy.
    Keywords: coordination; indirect network effects; lock-in; network effects; network externalities; switching costs
    JEL: D42 D43 L12 L13 L14 L15
    Date: 2006–08
  2. By: Boone, Jan
    Abstract: Theoretical IO models of horizontal mergers and acquisitions make the critical assumption of efficiency gains. Without efficiency gains, these models predict either that mergers are not profitable or that mergers are welfare reducing. A problem here is the empirical observation that on average mergers do not create efficiency gains. We analyze mergers in a model where firms cannot equalize marginal costs and marginal revenues over all dimensions in their action space due to constraints. In this type of model mergers can still be profitable and welfare enhancing while they create a loss in efficiency. The merger allows a firm to relax constraints. Further, this set up is consistent with the following stylized facts on mergers and acquisitions: M\&A's happen when new opportunities have opened up or industries have become more competitive (due to liberalization), they happen in waves, shareholders of the acquired firms gain while shareholders of the acquiring firms lose from the acquisition. Standard IO merger models do not explain these empirical observations.
    Keywords: constraints; deregulation; efficiency defence; merger waves; pro/anti-competitive mergers
    JEL: G34 K21 L40
    Date: 2006–07
  3. By: Grigory Kosenok (NES)
    Abstract: It is well known that under di¤erentiated product monopolistic competition any merger always increases the total pro…t of the merged entity. Because of this one might expect complete monopolization of a price competing industry provided that there are no (legal) barriers to acquisition (merger). In this paper we show that this is not always true. The industry may not get monopolized because the value of a fringe firm is getting higher when the concentration of the industry gets higher. This creates strategic incentives for a fringe firm to be last in the line of those who sell their businesses. Sometimes this type of incentive prevents industry monopolization.
    Date: 2005–08
  4. By: Smith, Howard; Thanassoulis, John
    Abstract: This paper considers buyer power in the presence of upstream competition to supply a homogeneous product. A likely consequence of upstream competition is that each supplier is uncertain of its final output, because it does not know how many downstream buyers will select it as a seller. We present a model where, for this reason, final volumes are uncertain for each seller. We find a new source of buyer power when the surplus function is nonlinear: the event of negotiation with a large buyer increases the seller's expected output, which changes the expected average net surplus from the deal; this increases buyer power when the seller's surplus function is concave (and diminishes it when convex). We explore consequences for welfare, industry productivity, and investment incentives.
    Keywords: buyer power
    JEL: L13 L42 L66
    Date: 2006–08
  5. By: Kühn, Kai-Uwe; Rimler, Michael S
    Abstract: We develop and illustrate a methodology for obtaining robust comparative statics results for collusion models in markets with differentiated goods by analyzing the homogeneous goods limit of these models. This analysis reveals that the impact of parameter changes on the incentives to deviate from collusion and the punishment profits are often of different order of magnitude yielding comparative statics results that are robust to the functional form of the demand system. We demonstrate with numerical calculations that these limiting results predict the global comparative statics at any degree of product differentiation. We use this methodology to demonstrate the non-robustness of Nash reversion equilibria and to develop new results in the comparative statics of collusion.
    Keywords: collusion; comparative statics; cross-ownership; differentiated products; robustness
    JEL: D43 L13 L41
    Date: 2006–07
  6. By: Battigalli, Pierpaulo; Fumagalli, Chiara; Polo, Michele
    Abstract: This paper analyses the sources of buyer power and its effect on sellers’ investment in quality improvements. In our model retailers make take-it-or-leave-it offers to a producer and each of them obtains its marginal contribution to total profits (gross of sunk costs). In turn, this depends on the rivalry between retailers in the bargaining process. Rivalry increases when retailers are less differentiated and when decreasing returns to scale in production are larger. The allocation of total surplus affects the incentives of the producer to invest in product quality, an instance of the hold-up problem. An increase in buyer power not only makes the supplier and consumers worse off, but it may even harm retailers, that obtain a larger share of a smaller surplus. A repeated game argument shows that efficient quality improvements can be supported as an equilibrium outcome if the producer and retailers are involved in a long-term relationship.
    Keywords: buyer power; hold-up; non-cooperative bargaining
    JEL: L13 L4
    Date: 2006–09
  7. By: Argenton, Cédric (Dept. of Economics, Stockholm School of Economics)
    Abstract: Fumagalli and Motta (2006) show that in the case of a homogenous product, competition at the retail level prevents an incumbent upstream firm from using exclusivity contracts in order to deter the entry of a more efficient rival. We show here that in the case where the upstream firms sell vertically differentiated products, the result is reversed. Indeed, upon entry, because of differentiation, the incumbent's inferior product is not eliminated from the market. As a consequence, the potential entrant cannot always capture the efficiency gains associated with the introduction of its superior product. Even when it does, the incumbent's survival is never at stake, which considerably decreases the amounts that both producers are willing to bid for the right of being distributed. As a consequence, in equilibrium, the incumbent is always able to convince retailers to sign on the exclusivity contracts.
    Keywords: vertical differentiation; contracts; exclusion; monopolization
    JEL: L12 L42
    Date: 2006–10–18
  8. By: Garcia-Pont, Carlos (IESE Business School)
    Abstract: Traditionally alliances have been left at of industry analysis. We have been focusing basically on the economic characteristics determining bargaining power on the relationships between the actors in a value system. The paper proposes a methodology to analyze industries from a very different perspective that incorporates alliances as one of the main drivers of industry structure.
    Keywords: Alliances; industry structure; networks;
    Date: 2006–09–11
  9. By: Slade, Margaret E. (Department of Economics, University of Warwick)
    Abstract: I discuss the use of simulation techniques to evaluate unilateral effects of horizontal mergers and the pitfalls that one can encounter when using them. Simple econometric models are desirable because they can be implemented in a short period of time and can be understood by non experts. Unfortunately, their predictions are often misleading. Complex models are more reliable but they require more time to implement and are less transparent. The use of merger simulations and the sensitivity of predictions to modeling choices is illustrated with an application to mergers in the UK brewing industry. There have been a number of brewing mergers that have changed the structure of the UK market, as well as proposed but unconsummated mergers that would have had even more profound effects. I assess two of them: the successful merger between Scottish&Newcastle and Courage and the proposed merger between Bass and Carlsberg–Tetley.
    Keywords: Unilateral effects, horizontal merger simulations, UK brewing
    JEL: L13 L41 L66 L81
    Date: 2006
  10. By: Martinez Granado, Maite; Siotis, Georges
    Abstract: A number of European countries, among which the UK and Spain, have opened up their Directory Enquiry Services (DQs) market to competition. In Spain, both local and foreign firms challenged the incumbent as of April 2003. The latter abused its dominant position by providing an inferior quality version of the (essential) input, namely the 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. 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 substantially below what it would have obtained in the absence of abuse.
    Keywords: abuse of dominance; competition policy; telecommunications
    JEL: C22 L41 L96
    Date: 2006–09
  11. By: Adrian R. Gourlay (Dept of Economics, Loughborough University); Geetha Ravishankar (Dept of Economics, Loughborough University); Tom Weyman-Jones (Dept of Economics, Loughborough University)
    Abstract: This paper offers an insight into the effectiveness of economic policy reforms in the Indian Banking System by examining the efficiency benefits of mergers among Scheduled Commercial Banks in India over the post-reform period 1991-92 to 2004-05. It does this by using the methodology developed by Bogetoft and Wang (2005). We also provide a metric for judging the success or failure of a merger. Overall, we find that bank mergers in the post-reform period possessed Considerable potential efficiency gains stemming from harmony gains. Post-merger efficiency analysis of the merged bank with a control group of non-merging banks reveals an initial merger related efficiency advantage for the former that, while persistent, did not show a sustained increase this failing to provide merging banks with a competitive advantage vis-a-viz their non-merging counterparts.
    Keywords: Data Envelopment Analysis, Mergers, Banking, Intermediation Approach, Production Approach.
    JEL: C14 G21 G34
    Date: 2006–10
  12. By: Uschi Backes-Gellner (Institute for Strategy and Business Economics, University of Zurich); Frank Maass (Institut für Mittelstandsforschung Bonn (IfM Bonn), (Institute for Small and Medium Size Enterprises, Bonn)); Arndt Werner (Institut für Mittelstandsforschung Bonn (IfM Bonn), (Institute for Small and Medium Size Enterprises, Bonn))
    Abstract: This paper investigates the determinants of inter-firm cooperation in research and development (R&D). We analyse the impact of structural and firm specific characteristics, market performance, access to resources and managerial techniques on different types of inter-firm R&D cooperation. Based on a survey of 886 enterprises in manufacturing and industry/business-related services located in Germany, we estimate several models with different types of R&D partnerships as a dependent variable to find out which types of enterprises are more or less likely to form or join either type of R&D partnership. The findings suggest that the availability and the quality of a firm’s own R&D resources are common factors driving R&D cooperation in general. Differentiating between cooperation activities in R&D among enterprises on the same production level on the one hand and vertical cooperation between enterprises and suppliers/customers or cross-sector alliances between enterprises and public research institutes on the other hand, we find cooperation type specific determinants of entry. The size of a firm, its location, access to financial resources and network experience seem to be most important.
    Keywords: cross-sector alliances, inter-firm cooperation; R&D cooperation; SME
    Date: 2005–02
  13. By: Asche, Frank; Steen, Frode
    Abstract: In this paper we apply the Bresnahan-Lau (1982) model to test for market power in the European distribution of salmon. In this particular setting, the model also incorporates a test of whether dumping takes place over time. Utilising data at the import level, derived demand equations are specified rather then consumer demand. From 1997 a so-called salmon agreement that implied minimum prices, a growth ceiling and a feeding restriction program for Norwegian farmers was imposed. Here we test whether the agreement resulted in an increase in the Norwegian market power. The results suggest that Norway did not have market power prior to the salmon agreement, and we find no indication that dumping was taking place. However, the agreement led to Norwegian market power after 1997. It is interesting to note that the agreement was initiated to prevent anti dumping duty of 13% that Norwegian farmers would have to pay otherwise. The increase in mark-up from imposing the agreement is found to be in the order of 14-15%, suggesting that the Norwegian farmers saved a fee of 13% and gained a markup that was even higher.
    Keywords: anti-dumping; market power; salmon markets
    JEL: C22 C32 L13
    Date: 2006–08
  14. By: Toshihiro Okubo (Graduate Institute of International Studies, Geneva (HEI)); Vincent Rebeyrol (Panthéon-Sorbonne Economie)
    Abstract: This paper studies how market-specific entry sunk costs (regulation costs) affect the Home Market Effect (HME) with firm heterogeneity in marginal costs. our model is based on the Dixit-Stiglitz monopolistic competition model with firm heterogeneity plus regulation costs difference. We find that a regulation costs gap works as dispersion force by inducing a market potential gap, which reduces the HME and could cause the reverse HME or the anti-HME. The HME first rises and then fall in terms of trade openness, whereas the HME rises in terms of regulation costs gap coordination by technical barriers to trade (TBT) agreements. Firm heterogeneity dampens the dispersion force by the regulation costs difference and thus works as an agglomeration force. Firm heterogeneity causes a perfectspatial sorting, in which a large country attracts only high productivity firms, and vice versa.
    Keywords: Home market effect, firm heterogeneity, regulation costs, technical barriers to trade.
    JEL: F12 F15 R12 R38
    Date: 2006–07
  15. By: Spagnolo, Giancarlo
    Abstract: The paper reviews the recent evolution of leniency programs for cartels in the US and EU, surveys their theoretical economic analyses, and discusses the empirical and experimental evidence available, also looking briefly at related experiences of rewarding whistleblowers in other fields of law enforcement. It concludes with a list of desiderata for leniency and whistleblower reward programs, simple suggestions how to improve current ones, and an agenda for future research. The issues discussed appear relevant to the fight of other forms of multiagent organized crime - like auditor-manager collusion, financial fraud, or corruption - that share with cartels the crucial features that well designed leniency and whistleblower programs exploit.
    Keywords: amnesty; antitrust; cartels; collusion; competition policy; corporate crime; corruption; deterrence; immunity; leniency; organized crime; self-reporting; snitches; whistleblowers
    JEL: K31 K42 L13 L44
    Date: 2006–08
  16. By: Leahy, Dermot; Naghavi, Alireza
    Abstract: This paper investigates how the mode of entry into a foreign market can be influenced by the intensity of R&D in an industry and the protection of intellectual property rights (IPR) in a recipient country. It then analyzes the link between the IPR regime and policies that place limits on the degree of foreign ownership in a joint venture (JV). In particular, we study the effect of the IPR regime of the host country (South) on a multinational’s decision between serving a market via greenfield foreign direct investment to avoid the exposure of its technology or entering a JV with a local firm, which allows R&D spillovers to a third firm under imperfect IPRs. JV is the equilibrium market structure when extra rents can be gained from a JV. This occurs when R&D intensity is moderate and IPRs strong. The South can gain from increased IPR protection by encouraging a JV, whereas policies to limit foreign ownership in a JV gain importance in technology intensive industries as complementary policies to strong IPRs. The South never finds it optimal to fully protect IPRs and concede all bargaining power in a JV to the Northern firm.
    Keywords: bargaining; development; FDI policy; intellectual property rights; joint ventures; R&D spillovers; technology transfer
    JEL: F13 F23 L24 O24 O32 O34
    Date: 2006–05
  17. By: Marimon, Ramon; Quadrini, Vincenzo
    Abstract: We study how barriers to competition - such as, restrictions to business start-up and strict enforcement of covenants or IPR - affect the investment in knowledge capital when contracts are not enforceable. These barriers lower the competition for human capital and reduce the incentive to accumulate knowledge. We show in a dynamic general equilibrium model that this mechanism has the potential to account for significant cross-country income inequality.
    Keywords: contract enforcement; economic growth; human capital
    JEL: L14 O4
    Date: 2006–09
  18. By: Ariane Lambert Mogiliansky (Paris-Jourdan Sciences Economiques); Grigory Kosenok (NES)
    Abstract: In this paper, we investigate interaction between two firms engaged in a repeated procurement relationship modelled as a multiple criteria auction, and an auctioneer (a government employee) who has discretion in devising the selection criteria. A first result is that, in a one-shot context, favoritism turns the asymmetric information (private cost) procurement auction into a symmetric information auction (in bribes) for a common value prize. In a repeated setting we show that favoritism increases the gains from collusion and contributes to solving basic implementation problems for a cartel of bidders that operates in a stochastically changing environment. A most simple allocation rule where firms take turn in winning independently of stochastic government preferences and firms’ costs is optimal. In each period the selection criteria is fine-tailored to the in-turn winner: the "environment” adapts to the cartel. This result holds true when the expected punishment is a fixed cost. When the cost varies with the magnitude of the distortion of the selection criteria (compared with the true government’s preferences), favoritism only partially shades the cartel from the environment. Nevertheless, even in this case favoritism greatly simplifies matters for the cartel. We thus find that favoritism generally facilitates collusion at a high cost for society. Some policy implications of the analysis are suggested.
    Keywords: auction, collusion, favoritism, procurement
    JEL: D44 D73 H57
    Date: 2006–05
  19. By: Grossman, Gene; Lai, Edwin
    Abstract: Price controls create opportunities for international arbitrage. Many have argued that such arbitrage, if tolerated, will undermine intellectual property rights and dull the incentives for investment in research-intensive industries such as pharmaceuticals. We challenge this orthodox view and show, to the contrary, that the pace of innovation often is faster in a world with international exhaustion of intellectual property rights than in one with national exhaustion. The key to our conclusion is to recognize that governments will make different choices of price controls when parallel imports are allowed by their trade partners than they will when they are not.
    Keywords: intellectual property; pharmaceuticals; reimportation; TRIPs
    JEL: F13 O34
    Date: 2006–08

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.