nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒11‒04
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. Upstream market foreclosure By Jean j., GABSZEWICZ; Skerdilajda, ZANAJ
  2. Tacit Collusion in the Presence of Cyclical Demand and Endogenous Capacity Levels By Christopher R. Knittel; Jason J. Lepore
  3. Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous By De Donder, Philippe; Roemer, John E
  4. Cournot Competition By Andrew F. Daughety
  5. Outsourcing Induced by Strategic Competition By Yutian Chen; Pradeep Dubey; Debapriya Sen
  7. Hotelling Was Right About Snob/Congestion Goods (Asymptotically) By Christian Ahlin; Peter Ahlin
  8. Strategic Incompatibility in ATM Markets By Christopher R. Knittel; Victor Stango
  9. The Cost of Banking Regulation By Guiso, Luigi; Sapienza, Paola; Zingales, Luigi
  10. Regulation – the Corridor to Liberalization: The Experience of the Israeli Phone Market 1984-2005 By Reuben Gronau
  11. Contractual Institutions, Financial Development and Vertical Integration: Theory and Evidence By Macchiavello, Rocco
  12. Sophisticated discipline in a nascent deposit market: Evidence from post-communist Russia By Karas, Alexei; Pyle, William; Schoors, Koen
  13. An overview of Stackelberg pricing in networks By Hoesel Stan van

  1. By: Jean j., GABSZEWICZ (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Skerdilajda, ZANAJ
    Abstract: This paper investigates how an incumbent monopolistic can weaken potential rivals or deter entry in the output market by manipulating the access of these rivals in the input market. We analyze two polar cases. In the first one, the input market is assumed to be competitive with the input being supplied inelastically. We show that the situation opens the door to entry deterrence. Then, we assume that the input is supplied by a single seller who chooses the input price. In this case we show that entry deterrence can be reached only through merger with the seller of the input.
    Keywords: Entry deterrence, Foreclosure, Overinvestment, Bilateral monopoly
    JEL: D20 D43 L42
    Date: 2006–02–24
  2. By: Christopher R. Knittel; Jason J. Lepore
    Abstract: We analyze tacit collusion in an industry characterized by cyclical demand and long-run scale decisions; firms face deterministic demand cycles and choose capacity levels prior to competing in prices. Our focus is on the nature of prices. We find that two types of price wars may exist. In one, collusion can involve periods of mixed strategy price wars. In the other, consistent with the Rotemberg and Saloner (1986) definition of price wars, we show that collusive prices can also become countercyclical. We also establish pricing patterns with respect to the relative prices in booms and recessions. If the marginal cost of capacity is high enough, holding current demand constant, prices in the boom will be generally lower than the prices in the recession; this reverses the results of Haltiwanger and Harrington (1991). In contrast, if the marginal cost of capacity is low enough, then prices in the boom will be generally higher than the prices in the recession. For costs in an intermediate range, numerical examples are calculated to show specific pricing patterns.
    JEL: L0 L1 L13 L49
    Date: 2006–10
  3. By: De Donder, Philippe; Roemer, John E
    Abstract: We study a vertically differentiated market where two firms simultaneously choose the quality and price of the good they sell and where consumers also care for the average quality of the goods supplied. Firms are composed of two factions whose objectives differ: one is maximizing profit while the other maximizes revenues. The equilibrium concept we model, called Firm Unanimity Nash Equilibrium (FUNE), corresponds to Nash equilibria between firms when there is efficient bargaining between the two factions inside both firms. One conceptual advantage of FUNE is that oligopolistic equilibria exist in pure strategies, even though the strategy space (price, quality) is multi-dimensional. We first show that such equilibria are inefficient, with both firms underproviding quality. We then assume that the government takes a participation in one firm, which introduces a third faction, bent on welfare maximization, in that firm. We study the characteristics of equilibria as a function of the extent of government's participation. Our main results are twofold. First, government's participation in the firm providing the low quality good decreases efficiency while participation in the firm providing the high quality good increases efficiency. Second, the optimal degree of government's participation in the high-quality firm increases with how much consumers care for average equality.
    Keywords: factions; mixed oligopoly; party-unanimity Nash equilibrium; vertical differentiation
    JEL: D21 D43 D62 H82
    Date: 2006–10
  4. By: Andrew F. Daughety (Department of Economics and Law School, Vanderbilt University)
    Abstract: Cournot's 1838 model of strategic interaction between competing firms has become the primary workhorse for the analysis of imperfect competition, and shows up in a variety of fields, notably industrial organization and international trade. This entry begins with a tour of the basic Cournot model and its properties, touching on existence, uniqueness, stability, and efficiency; this discussion especially emphasizes considerations involved in using the Cournot model in multi-stage applications. A discussion of recent applications is provided as well as the URL for an extended bibliography of approximately 125 selected publications from 2001 through 2005.
    Keywords: Cournot models, Cournot equilibrium, oligopoly, multi-stage models of competition, best-response functions.
    JEL: D43
    Date: 2006–10
  5. By: Yutian Chen (Dept. of Economics, SUNY-Stony Brook); Pradeep Dubey (Dept. of Economics, SUNY-Stony Brook); Debapriya Sen (Dept. of Economics, SUNY-Stony Brook)
    Abstract: We show that intermediate goods can be sourced to firms on the "outside" (that do not compete in the final product market), even when there are no economies of scale or cost advantages for these firms. What drives the phenomenon is that "inside" firms, by accepting such orders, incur the disadvantage of becoming Stackelberg followers in the ensuing competition to sell the final product. Thus they have incentive to quote high provider prices to ward off future competitors, driving the latter to source outside.
    Keywords: Intermediate goods, Outsourcing, Cournot duopoly, Stackelberg duopoly
    JEL: D41 L11 L13
    Date: 2006–11
  6. By: Hernán Vallejo G
    Abstract: The theories of natural market structures have been well known in economics for a long time. In this paper, a framework for such natural market structures is developed, where natural monopoly, natural oligopoly, perfect competition and monopolistic competition are special cases. The paper explains why with increasing returns to scale at the level of the firm; a given market size; a continuum of firms; complete information and homogeneous goods, there is usually a margin for regulation –most notably when the number of firms in the market is low. The paper shows that R&D, FDI and trade liberalization can improve welfare, and that they can be complements or imperfect substitutes to the need for market regulation. It is argued that when markets are expected to grow, or technologies to change, avoiding policies that prevent entry of firms –such as licences- can reduce significantly the need for regulation while allowing for a more efficient allocation of resources. It is also argued that the need for market regulation can be better explained by the exploitation of economies of scale, than by the existence of economic rents. Finally, the paper shows that when there is a discrete number of firms, the level of profits and the regulatory margins, can be described by a “saw”
    Date: 2006–02–05
  7. By: Christian Ahlin (Department of Economics, Vanderbilt University); Peter Ahlin (Chatham Financial)
    Abstract: We add congestion/snobbery to the Hotelling model of spatial competition. For any firm locations on opposite sides of the midpoint, a pure strategy price equilibrium exists and is unique if congestion costs are strong enough relative to transportation costs. The maximum distance between firms in any pure strategy symmetric location equilibrium declines toward zero as congestion costs increase relative to transportation costs. For any non-zero minimum distance between firms, high enough congestion costs relative to transportation costs guarantee that the unique pure strategy symmetric location equilibrium involves minimum differentiation. In this sense Hotelling was right about differentiation of snob/congestion goods.
    Keywords: Hotelling, spatial competition, differentiation, congestion, snobbery
    JEL: D21 D43 R12
    Date: 2006–10
  8. By: Christopher R. Knittel; Victor Stango
    Abstract: We test whether firms use incompatibility strategically, using data from ATM markets. High ATM fees degrade the value of competitors' deposit accounts, and can in principle serve as a mechanism for siphoning depositors away from competitors or for creating deposit account differentiation. Our empirical framework can empirically distinguish surcharging motivated by this strategic concern from surcharging that simply maximizes ATM profit considered as a stand-alone operation. The results are consistent with such behavior by large banks, but not by small banks. For large banks, the effect of incompatibility seems to operate through higher deposit account fees rather than increased deposit account base.
    JEL: K21 L1 L12 L4 L41 L44 L84
    Date: 2006–10
  9. By: Guiso, Luigi; Sapienza, Paola; Zingales, Luigi
    Abstract: We use exogenous variation in the degree of restrictions to bank competition across Italian provinces to study both the effects of bank regulation and the impact of deregulation. We find that where entry was more restricted the cost of credit was higher and - contrary to expectations- access to credit lower. The only benefit of these restrictions was a lower proportion of bad loans. Liberalization brings a reduction in rates spreads and an increased access to credit at a cost of an increase in bad loans. In provinces where restrictions to bank competition were most severe, the proportion of bad loans after deregulation raises above the level present in more competitive markets, suggesting that the pre-existing conditions severely impact the effect of liberalizations.
    Keywords: macroeconomics; monetary economics
    JEL: E0 G10
    Date: 2006–10
  10. By: Reuben Gronau
    Abstract: An important part of the literature on regulatory economics is based on the US experience, where a well-established regulator faces a privately owned monopoly. It is sometimes forgotten that this model does not apply in many places where a newly established regulator faces a government owned, or a newly privatized, company. It definitely does not apply to the case of the Israeli communication industry where the government serves as regulator and at the same time is the owner of the wireline monopolist. The paper follows the regulatory experience of the Israeli communication industry over the last 20 years, analyzing its impact on consumers' welfare, the monopoly's profitability and its productivity. Though the Israeli institutions may look to a Western observer today as unique they were quite common in most of the developed economies prior to the wave of privatizations and deregulation in the 90s. The lessons learned from the Israeli experience have, however, more than a historic interest, and may be relevant for the regulatory process in general.
    JEL: K2 L43 L5 L51 L96
    Date: 2006–10
  11. By: Macchiavello, Rocco
    Abstract: This paper develops an industry equilibrium model of vertical integration under contractual imperfections with specific input suppliers and external investors. I assume that vertical integration economizes on the needs for contracts with specific input suppliers at the cost of higher financial requirements. I show that the two forms of contractual imperfections have different effects on the degree of vertical integration, and that contractual frictions with external investors affect vertical integration through two opposing channels: a direct negative, investment, effect and an indirect positive, entry, effect. Using cross-country-industry data, I present novel evidence on the institutional determinants of international differences in vertical integration which is consistent with the predictions of the theoretical model. In particular, I show that countries with more developed financial systems are relatively more vertically integrated in industries that are dominated by large firms.
    Keywords: contract enforcement; credit constraints; developing countries; industry equilibrium; vertical integration
    JEL: D23 L11 L22 O14
    Date: 2006–10
  12. By: Karas, Alexei (BOFIT); Pyle, William (BOFIT); Schoors, Koen (BOFIT)
    Abstract: Using a database from post-communist, pre-deposit-insurance Russia, we demonstrate the presence of quantity-based sanctioning of weaker banks by both firms and households, particularly after the financial crisis of 1998. Evidence for the standard form of price discipline, however, is notably weak. We estimate the deposit supply function and show that, particularly for poorly capitalized banks, interest rate increases exhibit diminishing, and eventually negative, returns in terms of deposit attraction. These findings are consistent with depositors interpreting the deposit rate itself as a complementary proxy of otherwise unobserved bank-level risk.
    Keywords: market discipline; deposit market; transition; Russia
    JEL: G21 O16 P20
    Date: 2006–10–26
  13. By: Hoesel Stan van (METEOR)
    Abstract: The Stackelberg pricing problem has two levels of decision making: tariff setting by an operator, and then selection of the cheapest alternative by customers. In the network version, an operator determines tariffs on a subset of the arcs that he owns. Customers, who wish to connect two vertices with a path of a certain capacity, select the cheapest path. The revenue for the operator is determined by the tariff and the amount of usage of his arcs. The most natural model for the problem is a (bilinear) bilevel program, where the upper level problem is the pricing problem of the operator, and the lower level problem is a shortest path problem for each of the customers. This paper contains a compilation of theoretical and algorithmic results on the network Stackelberg pricing problem. The description of the theory and algorithms is generally informal and intuitive. We redefine the underlying network of the problem, to obtain a compact representation. Then we describe a basic branch-and-bound enumeration procedure. Both concepts are used for complexity issues and for the development of algorithms: establishing NP-hardness, approximability, special cases solvable in polynomial time, and an efficient exact branch-and-bound algorithm.
    Keywords: Economics ;
    Date: 2006

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