nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒11‒12
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Bundling and Collusion on Communications Markets By Edmond Baranes
  2. Tying in Two-Sided Markets with Multi-Homing By Jay Pil Choi
  3. Flexible Investment Decisions in the Telecommunications Industry: Case Applications using Real Options By Nicholas Economides
  4. Platform Competition: The Role of Multi-homing and Complementors By Juan D. Carrillo; Guofu Tan
  5. Failing Firm Defense with Entry Deterrence By Alessandro Fedele; Massimo Tognoni
  6. An Experimental Examination of Competitor-Based Price Matching Guarantees By Datta, Shakun; Offenberg, Jennifer
  7. Discriminatory Competition and Local competition By Jack Ochs; S.K. Han
  8. Strategic Incompatibility in ATM Markets By Christopher R. Knittel; Victor Stango
  9. Microeconomic determinants of acquisitions of Eastern European banks by Western European banks By G. LANINE; R. VANDER VENNET
  10. Simulation of Merger in Mobile Telephony in Portugal By Lukasz Grzybowski; Pedro Pereira
  11. Mobile Phone Mergers and Market Shares Short Term Losses and Long Term Gains By Jeremy T. Fox; Hector Perez
  12. Airline Pricing, Price Dispersion and Ticket Characteristics On and Off the Internet By Anirban Sengupta; Steven Wiggins
  13. Selling and Leasing Software with Network Externality By Jennifer Zhang; Abraham Seidmann
  14. An Empirical Analysis of Indirect Network Effects in the Home Video Game Market By James E. Prieger; Wei-Min Hu
  15. Interconnection of Cable Networks: A Regulation Proposal for Broadband Internet Services By Leitao, Joao
  16. Search Costs, Demand Structure and Long Tail in Electronic Markets: Theory and Evidence By Anindya Ghose; Bin Gu

  1. By: Edmond Baranes (University of Montpellier)
    Abstract: In this paper we examine competition between a cable operator and a telecom operator on broadband Internet service access whereas the cable operator monopolizes a TV market. We investigate the impact of bundling on the sustainability of collusion in an infinitely repeated game framework. We show that the bundling strategy of the cable operator may hinder collusion. Futhermore, we consider a setting in which the cable operator enters the broadband Internet service market using a one-way access that the incumbent possesses. We then show that when the cable operator bundles its products, a low access charge may increase the feasibility of collusion. This main result may have an important policy implication.
    Keywords: Bindling, Collusion, Differentiation.
    JEL: D43 L13 L9
    Date: 2006–10
  2. By: Jay Pil Choi (Michigan State University)
    Abstract: This paper analyzes the effects of tying arrangements on market competition and social welfare in two-sided markets when economic agents can engage in multi-homing, that is, they can participate in multiple platforms in order to reap maximal network benefits. The model shows that tying induces more consumers to multi-home and makes platform-specific exclusive content available to more consumers, which is also beneficial to content providers. As a result, tying can be welfare-enhancing if multi-homing is allowed, even in cases where its welfare impacts are negative in the absence of multi-homing. The analysis thus can have important implications for recent antitrust cases in industries where multi-homing is prevalent.
    Keywords: tying, two-sided markets, (indirect) network effects, multi-homing.
    JEL: L1 L4
    Date: 2006–09
  3. By: Nicholas Economides (Stern School of Business, New York University)
    Abstract: This paper discusses how antitrust law and regulatory rules should be applied to network industries. In assessing the application of antitrust in network industries, we analyze a number of relevant features of network industries and the way in which antitrust law and regulatory rules can affect them. These relevant features include (among others) network effects, market structure, market share and profits inequality, choice of technical standards, relationship between the number of active firms and social benefits, existence of market power, leveraging of market power in complementary markets, and innovation races. We find that there are often significant differences on the effects of application of antitrust law in network and non-network industries.
    Keywords: networks, network effects, public policy, antitrust, telecommunications, technical standards, lock-in, net neutrality, Internet, Microsoft, Trinko
    JEL: L4 L5
    Date: 2006–09
  4. By: Juan D. Carrillo (University of Southern California); Guofu Tan (University of Southern California)
    Abstract: In this paper we present a model of platform competition in which two firms offer horizontally differentiated platforms and a group of complementors offers products that are complementary to each platform. Consumers can buy either or both platforms (single- or multihoming) and complementors can produce for either or both platforms (single- or multi-production). We first characterize the pricing structure and find that, in equilibrium, consumers are more likely to multihome as the differentiation of platforms decreases or as the number of complementors for either platform increases. We show that the platform and its complementors always benefit from an increase in the number of complementors in their own platform. When single-homing arises in equilibrium, the platform and its complementors suffer from an increase in the number of complementors in the rival platform. We also study the incentives of the platform to integrate with its complementors, to charge them a royalty or give a subsidy, and to sell its own complementary products to the rival platform.
    Keywords: Platform competition, multi-homing, complementor, royalty and subsidy
    Date: 2006–10
  5. By: Alessandro Fedele; Massimo Tognoni
    Abstract: Under the principle of the Failing Firm Defense (FFD) a merger that would be blocked due to its harmful effect on competition could be nevertheless allowed when (i) the acquired firm is actually failing, (ii) there is no less anti-competitive alternative offer of purchase, (iii) absent the merger, the assets to be acquired would exit the market. We focus on potential anti-competitive effects of a myopic application of the third requirement by studying consequences of a horizontal merger on entry in a Cournot oligopoly with a failing firm. If the merger is blocked entry occurs and, when the industry is highly concentrated, consumer welfare is bigger because gains due to augmented competition exceed losses due to shortage of output.
    Keywords: Failing Firm Defense, Entry Deterrence, Consumer Surplus
    JEL: K21 L13 L41
    Date: 2006–10
  6. By: Datta, Shakun; Offenberg, Jennifer
    Abstract: We use experimental methods to demonstrate the anti-competitive potential of price matching guarantees in both symmetric and asymmetric cost duopolies. Our findings establish that when costs are symmetric, price-matching guarantees significantly increase market prices. In markets with cost asymmetries, guaranteed prices remain high relative to prices without the use of guarantees, but the overall ability of price guarantees to act as a collusion facilitating device becomes contingent on the relative cost difference. Lesser use of guarantees, combined with lower average prices and slower convergence to the collusive level, suggest that the mere presence of cost asymmetries may curtail collusive behavior.
    Keywords: Price Matching; Price Guarantees; Laboratory; Collusion
    JEL: D43 L13 L4
    Date: 2003–08–01
  7. By: Jack Ochs; S.K. Han
    Date: 2006–01
  8. By: Christopher R. Knittel (University of California, Davis); Victor Stango (Tuck School, Dartmouth)
    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 standalone 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.
    Date: 2006–09
    Abstract: A considerable number of Western European banks have acquired banks in Central and Eastern Europe from the mid-1990s onwards. The question is whether or not this will improve the efficiency and profitability of the Central and Eastern European banking sectors. We test the relative strength of the efficiency versus the market power hypotheses by investigating the bank-specific characteristics of the banks involved in the cross-border acquisitions. We also examine the determinants of the post-acquisition target banks’ performance. Our results indicate that large Western European banks have targeted relatively large and efficient CEEC banks with an established presence in their local retail banking markets. We find no evidence that cross-border bank acquisitions in the CEEC are driven by efficiency motivations. The evidence supports the market power hypothesis, raising concerns about the optimal balance between foreign ownership and competition.
    Keywords: Mergers and acquisitions, cross-border acquisitions, bank efficiency, transition economies, Central and Eastern Europe
    JEL: C30 E44 F21 G21
    Date: 2006–09
  10. By: Lukasz Grzybowski (University of Alicante); Pedro Pereira (Autoridade da Concorrencia, Portugal)
    Abstract: This article assesses the unilateral eects of a merger in the Portuguese mobile telephony market. We use aggregate quarterly data from 1999 to 2005 and a nested logit model to estimate the price elasticities of demand and the marginal costs of subscription to mobile services. We nd that mobile services provided by the rms in the market are close substitutes. Based on these estimates, we simulate the eects of the merger. The merger may result in substantial price increases, even in the presence of large cost eciencies.
    Keywords: mobile telephony, merger simulation, network eects, lock in, nested logit
    JEL: L13 L43 L93
    Date: 2006–10
  11. By: Jeremy T. Fox (University of Chicago); Hector Perez (University of Chicago)
    Abstract: The US mobile phone industry has dramatically consolidated through mergers. We investigate whether a merger increases the performance of a combined carrier over the sum of its constituent parts. We first directly compare the quantities of post-merger carriers to those of their pre-merger predecessors. This analysis considers only two years after a merger, as most carriers engage in new mergers after that time. To examine possible long run implications, we also explore the cross sectional relationship between outcomes and measures of firm size, as firm size is increased in a merger. We examine the market share of new subscribers. We also examine two measures of firm size: the amount of a carrier’s geographic coverage and its past subscriber count.
    Date: 2006–09
  12. By: Anirban Sengupta (Texas A&M University); Steven Wiggins (Texas A&M University)
    Abstract: This paper uses a unique individual transactions data set to investigate the effects of internet purchase on the prices paid for individual airline tickets. The analysis also investigates the effects of changes in the percentage of online transactions on both online and offline prices and on overall price dispersion. The analysis also uses these unique data to provide a more complete analysis of the factors affecting airline price levels and price dispersion, contributing more generally to our understanding of airline pricing. Our novel data set includes detailed transaction level data the includes ticket characteristics and restrictions, carrier, estimated flight level load factors, date of issue, departure date, other hedonic factors affecting prices, whether the ticket was purchased online or offline, and the share of online purchases for the citypair. Controlling for numerous observed ticket characteristics, as well as carrier and route effects, the results show that online prices average about 13 percent less than the offline prices. The analysis also shows that a ten percent increase in the online share of tickets sold on a route decreases average prices by an additional 5 percent, with more of this effect coming in the form of lower offline prices. The results also suggest that the potential savings to the consumers from buying online in markets with lower share of internet purchases are higher than in markets where the online share is larger. The paper also finds evidence that an increase in online shares decrease price dispersion. The paper also uses these unique data to investigate the effects of hub dominance and high route shares on pricing. Due to data limitations previous investigations of these issues could not control for important ticket characteristics, load factors, and time of purchase in measuring the effects of concentration on price levels and dispersion. Our analysis controls for these factors while investigating the impact of market concentration on price levels and dispersion.
    Keywords: search cost, online, offline, price dispersion
    JEL: L8 L93
    Date: 2006–09
  13. By: Jennifer Zhang (University of Toledo); Abraham Seidmann (University of Rochester)
    Abstract: Previous studies suggested that a monopoly durable goods seller can use leasing to effectively avoid the time-inconsistent problem raised by Coase Conjecture. This paper extends those previous works by examining the monopoly seller’s selling and leasing strategy for a special type of durable good --- software. We look at a software vendor that can sell (at a posted price) or lease his product where as a lesser he guarantees that the lessees will always have the latest version of the software. We address some of the specific issues of implementing the selling and/or leasing policies at the packaged software market, including the impact of network externality, upgrade compatibility, and commitment on pricing in a dynamic environment. We show that by properly defining their pricing structure, software vendors can segment the market and second-degree price discriminate the consumers. We also demonstrate how software vendors can manage the trade-offs of selling and leasing to achieve a higher profit as well as the corresponding welfare effect on the consumers.
    Keywords: Software licensing, Coarse Conjecture, Price discrimination, Network externality, Commitment, Upgrade, Compatibility, Risk.
    Date: 2006–09
  14. By: James E. Prieger (Pepperdine University); Wei-Min Hu (University of California, Davis)
    Abstract: We explore the indirect network effect in the market for home video games. We examine the video game console makers’ strategic choice between increasing demand by lowering console price and by encouraging the growth of software variety. We also explore the existence of an applications barrier to entry in the console market, and find that there is little evidence for such a barrier. Finally, we assess the applicability of the model to out-of-sample situations, to look at whether our model and previous similar models can generalize to other markets for purposes of marketing or antitrust inquiry. We find that the model generalizes reasonably well to the Japanese market for the same generation of gaming systems, but poorly to previous generations in the US market.
    Date: 2006–10
  15. By: Leitao, Joao
    Abstract: In this article a brief revision of the European and Portuguese Regulatory frameworks is made, especially in terms of the interconnection of broadband internet services that are offered by cable operators. A formalization with two cable networks is presented, in order to obtain a benchmark for symmetric networks, and two scenarios: collusion and regulated market; are developed. This justifies the implementation of regulatory policies, with the establishment of caps for the interconnection tariffs, in order to assure a larger penetration rate of the broadband internet services and a bigger total welfare.
    Keywords: Regulation; Tariffs of Interconnection; Goodwill.
    JEL: L51 D40
    Date: 2006–10–16
  16. By: Anindya Ghose (Stern School of Business, New York University); Bin Gu (McCombs School of Business, University of Texas at Austin)
    Abstract: It is well known that the Internet has significantly reduced consumers’ search costs online. But relatively little is known about how search costs affect consumer demand structure in online markets. In this paper, we identify the impact of search costs on firm competition and market structure by exploring a unique theoretical insight that search costs create a kink in aggregate demand when firms change prices. The significance of the kink reflects the magnitude of online search costs and the kinked demand function provides information on how search costs affect competition in the online market. Using a dataset collected from Amazon and Barnes & Noble, we find that search costs vary significantly across online retailers. Consumers face low search costs for price information from It leads to a higher price elasticity when the firm reduces prices than when it increases prices, increasing Amazon’s incentive to engage in price competition. On the other hand, consumers face relatively higher search costs for price information from Barnes & Noble. This leads to a lower price elasticity when Barnes & Noble reduces prices than when it increases prices, reducing Barnes & Noble’s incentive to engage in price competition. We also find that search costs decrease with the passage of time as the information about price changes dissipates among consumers, leading to increased price elasticity over time. Finally, we highlight that search costs are lower for popular books compared to rare and unpopular books. These findings have implications for the impact of the Internet on the Long Tail phenomenon.
    Keywords: Electronic Markets, Search Costs, Kinked Demand Curve, Price Elasticity, Price Competition, Long Tail
    Date: 2006–10

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