nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒11‒25
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. Horizontal Mergers with Free Entry in Differentiated Oligopolies By Nisvan Erkal; Daniel Piccinin
  2. Bargaining in Collusive Markets By Andersson, Ola
  3. Barriers to Retail Competition and Prices: Evidence from Spain By Alexander W. Hoffmaister
  4. The Analysis of Coordinated Effects in EU Merger Control: Where do we stand after Sony/BMG and Impala? By Oliver Budzinski; Gisela Aigner; Arndt Christiansen
  5. R&D Delegation in a Duopoly with Spillovers By Désiré Vencatachellum; Bruno Versaevel
  6. Market Analysis in the Presence of Indirect Constraints and Captive Sales By Roman Inderst; Tommaso Valletti
  7. Price Discrimination in Input Markets By Roman Inderst; Tommaso Valletti
  8. Mixing Goods with Two-Part Tariffs By Steffen Hoernig; Tommaso Valletti
  9. Auction theory, sequential local service privatization, and the effects of geographical scale economies on effective competition By Antonio Miralles
  10. Testing Optimal Punishment Mechanisms under Price Regulation: the Case of the Retail Market for Gasoline By Robert Gagné; Simon van Norden; Bruno Versaevel
  11. Endogenous Heterogeneity in Strategic Models: Symmetry-breaking via Strategic Substitutes and Nonconcavities By Rabah Amir; Filomena Garcia; Malgorzata Knauff
  12. Merger Clusters during Economic Booms By Albert Banal-Estañol; Paul Heidhues; Rainer Nitsche; Jo Seldeslachts
  13. The empirics of spatial competition: Evidence from European regions By Nestor Duch Brown
  14. Choice of new attributes in the "Elimination by Aspects" duopoly. By Reynald-Alexandre Laurent
  15. Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis By Tommaso Valletti; Stefan Szymanski
  16. Productivity Spillovers and the Entry of Foreign-Owned Firms: The Case of Japanese Manufacturing Firms By Yukako Murakami; Kyoji Fukao
  17. Private Enforcement against Collusion in Mechanism Design By Chen, Zhijun
  18. Advertising in Duopoly Market By Situngkir, Hokky
  19. Fighting Collusion in Tournaments By Chen, Zhijun

  1. By: Nisvan Erkal; Daniel Piccinin
    Abstract: Antitrust authorities view the possibility of entry as a key determinant of whether a proposed merger will be harmful to society. This paper examines the effects of horizontal mergers in models of non-localized, differentiated Bertrand oligopoly that allow for free entry. The analysis of the long run effects of mergers in differentiated products markets raises issues that are significantly different from those in the short run or in homogeneous products markets due to the introduction of new varieties. Our analysis reveals that determining the properties of consumer preferences is crucial to the antitrust analysis of mergers in differentiated products markets. Specifically, we show that if the demand system satisfies the Independence from Irrelevant Alternatives (IIA) property and if the number of firms is treated as a continuous variable, mergers in differentiated products markets have no long run effect on consumer welfare. Moreover, in this case, marginal cost savings are to a large extent irrelevant to the consumer welfare effects of mergers. If the number of firms is treated as a discrete variable, fixed or marginal cost savings are a necessary condition for mergers to have zero or positive effect on consumer welfare. Using the example of linear demand, we show that if the demand system does not satisfy the IIA property, mergers in differentiated products markets can harm consumer welfare in long run equilibrium. Moreover, the amount of harm increases with consumers’ taste for variety.
    Keywords: Horizontal mergers; free entry; product differentiation; independence from irrelevant alternatives; antitrust policy
    JEL: L13 L22 L41 K21
    Date: 2006
  2. By: Andersson, Ola (Department of Economics, Lund University)
    Abstract: In this paper we investigate collusion in an infinitely repeated Bertrand duopoly where firms have different discount factors. In order to study how a collusive agreement is reached we model the equilibrium selection as an alternating-offer bargaining game. The selected equilibrium has several appealing features: First, it is efficient in the sense that it entails immediate agreement on the monopoly price. Second, the equilibrium shows how discount factors affect equilibrium market shares. A comparative statics analysis on equilibrium market shares reveals that changes in discount factors may have ambiguous effects on market shares.
    Keywords: Bargaining; different discount factors; explicit collusion; market shares
    JEL: C72 D43 L11 L41
    Date: 2006–11–14
  3. By: Alexander W. Hoffmaister
    Abstract: Why do prices in Spain's regions fail to converge? The prime suspects for this puzzling result are differences in regional barriers to entry in retail distribution. This paper develops a Cournot-Nash model of imperfect competition to illustrate the effect of barriers on prices. A unique data set-derived from an extensive analysis of competition policies in Spain- provides evidence that barriers to entry increase regional prices. The evidence also suggests that, consistent with the model's predictions, barriers to entry raise prices up to a point, and thus indicate that barriers have a threshold effect on prices.
    Keywords: Barriers to entry , Cournot-Nash model , regulation in goods markets , and panel cointegration ,
    Date: 2006–10–20
  4. By: Oliver Budzinski (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Gisela Aigner; Arndt Christiansen (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: The recent Impala Judgment by the CFI on the Sony/BMG Decision by the Commission represents the most important ruling on collective dominance since Airtours. We review both the Decision and the Judgment and derive implications for the institutional and substantive development of EU Merger Control. Firstly, Impala introduces an ambitious symmetric standard of proof for prohibition and clearance decisions by the Commission. While alleviating fears of an increasing number of false positives in the aftermath of Airtours, this entails the problem of how to deal with cases in which neither the existence, nor the absence of anticompetitive effects can be proven to the required standard. Secondly, the ongoing process of increasing the role of third parties in European Merger Control is fuelled. Thirdly, Impala has the potential to herald a comeback of coordinated effects analysis, further precising the conditions for establishing this kind of anticompetitive effect. Additionally, given the characteristics of the music industry, we criticise a lack of in-depth economic analysis of non-price competition issues, such as innovations and product diversity.
    Keywords: merger control, coordinated effects, standard of proof, music industry, collusion, Impala, Sony/BMG
    JEL: K21 L41 L13 L82
    Date: 2006
  5. By: Désiré Vencatachellum (IEA, HEC Montréal); Bruno Versaevel
    Abstract: There is evidence that competing firms delegate R&D to the same independent profit-maximizing laboratory. We draw on this stylilzed fact to construct a model where two firms in the same industry offer transfer payments in exchange of user-specific R&D services from a common laboratory. Inter-firm and within-laboratory externalities affect the intensiti of competition among delegating firms on the intermediate market for technology. Whether competition is relatively soft or tight is reflected by each firm’s transfer payment offers to the laboratory. This in turn determines the laboratory’s capacity to earn profits, R&D outcomes, delegating firms’ profits, and social welfare. We compare the delegated R&D game to two other one where firms (i) cooperatively conduct in-house R&D, and (ii) non-cooperatively choose in-house R&D. The delegated R&D game Pareto dominates the other two games, and the laboratory earns positive profits, only if within-laboratory R&D services are sufficiently complementary, but inter-firm spillovers are sufficiently low. We find no room for policy intervention, because the privately profitable decision to delegate R&D, when the laboratory participates, always benefits consumers.
    Keywords: Research and development, externalities, common agency.
    JEL: C72 L13 O31
    Date: 2005–01
  6. By: Roman Inderst (London School of Economics & Political Science); Tommaso Valletti (Imperial College London, University of Rome "Tor Vergata" and CEPR)
    Abstract: This paper analyzes merchant markets in the presence of vertically-integrated firms. We discuss when vertical integration tends to increase the elasticity of (derived) demand in the merchant market because of indirect contraints arising from the retail market. We also discuss the relevance of different measures of market power such as market shares in the wholesale or retail market. We provide insights into the likely effect of an upstream merger under vertical integration, depending on, for instance, whether the integrated firm currently sells into the merchant market or whether this can be expected after the merger.
    Keywords: market definition, wholesale, SSNIP, vertical integration
    JEL: L40
    Date: 2006–09–01
  7. By: Roman Inderst (London School of Economics & Political Science); Tommaso Valletti (Imperial College London, University of Rome "Tor Vergata" and CEPR)
    Abstract: We analyze the short- and long-run implications of third-degree price discrimination in input markets where downstream firms differ in their efficiency. In contrast to the extant literature, where the supplier is typically an unconstrained monopolist, in our model input prices are constrained by the potential for demand-side substitution. This modification has far-reaching consequences. We show that more efficient firms receive lower input prices under price discrimination, and that the imposition of uniform pricing could stifle incentives to reduce own marginal costs. If downstream firms compete in the same market, we also find a waterbed effect, in that a reduction in a firm's own marginal costs not only reduces its own input price, but increases the input price of its competitors.
    Keywords: Price Discrimination, Uniform Pricing, Input Market
    JEL: K21 L13 L42
    Date: 2006–07–01
  8. By: Steffen Hoernig (New University of Lisbon - Faculdade de Economia); Tommaso Valletti (Imperial College London, University of Rome "Tor Vergata" and CEPR)
    Abstract: We consider a market where consumers mix content offered by different firms. We show how tariff structures have an impact on firms' profits and efficiency. As compared to pure linear pricing, when firms charge two-part tariffs they make higher profits, while consumers are worse off and the allocation is not first-best since too little mixing occurs. Flat subscription fees make mixing unattractive and are Pareto-dominated by all the other types of tariffs.
    Keywords: Two-part tariffs, flat fees, combinable products, pay-per-view
    JEL: L13 L82
    Date: 2006–08–01
  9. By: Antonio Miralles (Universitat de Barcelona)
    Abstract: A sequential weakly efficient two-auction game with entry costs, interdependence between objects, two potential bidders and IPV assumption is presented here in order to give some theoretical predictions on the effects of geographical scale economies on local service privatization performance. It is shown that the first object seller takes profit of this interdependence. The interdependence externality rises effective competition for the first object, expressed as the probability of having more than one final bidder. Besides, if there is more than one final bidder in the first auction, seller extracts the entire bidders expected future surplus differential between having won the first auction and having lost. Consequences for second object seller are less clear, reflecting the contradictory nature of the two main effects of object interdependence. On the one hand, first auction winner becomes stronger, so that expected payments rise in a competitive environment. On the other hand, first auction loser becomes relatively weaker, hence (probably) reducing effective competition for the second object. Additionally, some contributions to static auction theory with entry cost and asymmetric bidders are presented in the appendix.
    Keywords: local service, privatization
    Date: 2005
  10. By: Robert Gagné (IEA, HEC Montréal); Simon van Norden (IEA, HEC Montréal); Bruno Versaevel
    Abstract: We analyse the effects of a price floor on price wars (or deep price cuts) in the retail market for gasoline. Bertrand supergame oligopoly models predict that price wars should last longer in the presence of price floors. In 1996, the introduction of a price floor in the Quebec retail market for gasoline serves as a natural experiment with which to test this prediction. We use a Markov Switching Model with two latent states to simultaneously identify the periods of price-collusion/price-war and estimate the parameters characterizing each state. Results support the prediction that price floors reduce the intensity of price wars but increase their expected duration.
    Keywords: price regulation, oligopoly supergame, Markov switching model, gasoline
    JEL: L13 L81 C32
    Date: 2006–10
  11. By: Rabah Amir; Filomena Garcia; Malgorzata Knauff
    Abstract: This paper is an attempt to develop a unified approach to endogenous heterogeneity by constructing general class of two-player symmetric games that always possess only asymmetric pure-strategy Nash equilibria. These classes of games are characterized in some abstract sense by two general properties: payo? non-concavities and some form of strategic substitutability. We provide a detailed discussion of the relationship of this work with Matsuyama’s symmetry breaking framework and with business strategy literature. Our framework generalizes a number of models dealing with two-stage games, with long term investment decisions in the first stage and product market competition in the second stage. We present the main examples that motivate this study to illustrate the generality of our approach.
    Keywords: firm heterogeneity; submodular games; business strategy; innovation strategies.
    JEL: C72 C62 L11
  12. By: Albert Banal-Estañol; Paul Heidhues; Rainer Nitsche; Jo Seldeslachts
    Abstract: Merger activity is intense during economic booms and subdued during recessions. This paper provides a non-financial explanation for this observable pattern. We construct a model in which the target-by setting the takeover price-screens the acquirer on his (expected) ability to realize synergy gains when merging. In an economic boom, it is less profitable to sort out relatively "bad fit" acquirers, leading to a hike in merger activity. Although positive economic shocks produce expected gains at the time of merging, these mergers turn out to be less efficient in the long term-a finding that is broadly consistent with the existing empirical evidence. Furthermore, again because of the absence of boom-time screening, the more efficient acquirers earn higher merger profits during "merger waves" than outside of waves, which is also in line with empirical evidence. <br> <br> <i>ZUSAMMENFASSUNG - (Fusionscluster in Boomphasen) <br>In Zeiten wirtschaftlicher Hochkonjunktur ist die Zahl der Firmenzusammenschlüsse hoch, in Rezessionszeiten eher niedrig. Dieser Aufsatz gibt eine Erklärung für diese Beobachtung, die nicht auf rein finanzwirtschaftlichen Faktoren beruht. <br> Im vorgestellten Modell ha das Unternehmen, welches übernommen wird, die Möglichkeit, den Übernahmepreis festzulegen und kann damit auch die übernehmende Firma auswählen. Das Auswahlkriterium sind die erwarteten Synergiegewinne im Falle einer Fusion, die für eine gute Passung der beiden fusionierenden Unternehmen sprechen. In Phasen der Hochkonjunktur ist es allerdings für Unternehmen generell interessant, zu fusionieren, und es wird relativ weniger profitabel, großen Auswahlaufwand zu treiben, um schlecht passende Fusionspartner auszusortieren und eventuell gar keinen Fusionspartner zu finden. Daher kommt es in diesen Zeiten zu mehr Fusionen als in anderen Konjunkturphasen, die als Fusionswellen bezeichnet werden. Zum Zeitpunkt der Fusion lassen sich auch die erwarteten Gewinne durch die günstige ökonomische Gesamtsituation realisieren. Im weiteren Verlauf stellen sich jedoch solche Fusionen mit schlecht passenden Partnern als wenig effizient heraus-was auch empirische Analysen bestätigt haben. <br> Darüber hinaus zeigt das Modell, dass-wiederum wegen der fehlenden Auswahlprozedur in Boomphasen-die effizienteren Fusionspartner während Fusionswellen höhere Gewinne machen als außerhalb von Fusionswellen. Dies ist zuvor bereits empirisch beobachtet worden.</i>
    Keywords: Mergers, Merger Waves, Screening
    JEL: D21 D80 L11
    Date: 2006–09
  13. By: Nestor Duch Brown (Universitat de Barcelona)
    Abstract: The New Economic Geography literature allows detailed analysis of the factors that determine the location decisions of firms in integrated markets. However, the competitive process is modelled in a rather rudimentary way, and the empirical evidence has usually been obtained from reduced-form econometric specifications. This study describes a structural model that takes into account strategic interactions between firms. We investigate the relationship between the degree of perceived competition not only from local firms but from firms in other regions and geographic concentration. The preliminary results indicate that, in aggregate terms, local firms present stronger competition than firms in other regions. Moreover, it is confirmed that greater geographical concentration of production reduces market power, due to the intensification of local competition; however, its impact on production costs is unclear.
    Keywords: agglomeration, conjectural variations, spatial competition
    JEL: F15 L11 L22 L23 L60 R15 R32
    Date: 2006
  14. By: Reynald-Alexandre Laurent
    Abstract: The "Elimination by aspects" (EBA) duopoly of product differentiation (Laurent, 2006a) was constructed from the discrete model of probabilistic choice worked out by Tversky (1972a,b). In this framework, an unique price equilibrium exists with a "differentiation by attributes", which embodies horizontal and vertical differentiations as possible special cases. This paper extends this analysis by studying a two-stage game in which firms choose the specific attributes of their product and then compete in prices. At the price equilibrium, the "competitive effect", present in pure vertical differentiation models, is replaced by a "differentiation effect" in this EBA duopoly. Subgame perfect Nash equilibria are shown to exist with exogenous costs but also with attributes-dependent unit and fixed costs. At the equilibrium, products are generally differentiated both horizontally and vertically. But a purely vertical outcome may also occur when costs of innovation are strongly convex or when consumers are very sensible to the price levels. When costs are endogenous, the social optimum is achieved for a pure horizontal differentiation. Thus, there is too much differentiation at the equilibrium: the vertical dimension induces a strong raise of prices, which also reduces the welfare.
    Date: 2006
  15. By: Tommaso Valletti (Imperial College London, University of Rome "Tor Vergata" and CEPR); Stefan Szymanski (Imperial College London)
    Abstract: This paper analyses the issue of parallel trade (arbitrage) for products protected by intellectual property rights. We discuss a basic trade-off that arises between the ex post better allocation that typically occurs under parallel trade when demand dispersion is not too high, and the ex ante reduced product quality because of lower investment. We show that the size of the welfare effects is significantly affected by the presence of a "generic" product, which represents a form of competition for the monopolist. The monopolist will introduce a "fighting brand" to compete with the generic, which dilutes but does not eliminate the result on the adverse effects of parallel trade on investments.
    Keywords: Parallel trade, price discrimination, investments
    JEL: L12 F13 O34
    Date: 2006–10–01
  16. By: Yukako Murakami; Kyoji Fukao
    Abstract: This paper shows that in the short run an increase in foreign firms' industry share lowers the TFP growth of Japanese firms as a result of the decrease in market power. However, in the long run, the entry of foreign-owned firms has a positive effect on the productivity of local firms as a result of technology spillovers. In addition, the results suggest that foreign firms exert competitive pressure that forces Japanese firms with a high level of technological capabilities raise their productivity growth.
    Keywords: Technology Spillovers, Market Power, FDI, Productivity, Absorptive Capacity
    JEL: F11
    Date: 2006–11
  17. By: Chen, Zhijun
    Abstract: This paper brings a new point of view into the theory of collusion-proof mechanism design, which highlights the principle of divide and conquer. We relax the restriction of publicly enforced grand contract in the framework of Laffont-Martimort-Itoh, which allows us to incorporate the approach of private enforcement into the theory. In a setting of moral hazard with mutually observable actions, we develop a multi-stage mechanism integrated with secret reporting and private transferring and show that the first-best allocation can be implememted in spite of collusion, which implies that preventing collusion entails no cost under new approach.
    Keywords: secret report; private enforcement; collusion-proof mechanism design
    JEL: C72 D82
    Date: 2006–05
  18. By: Situngkir, Hokky
    Abstract: The paper presents the dynamics of consumer preferences over two competing products acting in duopoly market. The model presented compared the majority and minority rules as well as the modified Snazjd model in the Von Neumann neighborhood. We showed how important advertising in marketing a product is. We show that advertising should also consider the social structure simultaneously with the content of the advertisement and the understanding to the advertised product. Some theoretical explorations are discussed regarding to size of the market, evaluation of effect of the advertising, the types of the advertised products, and the social structure of which the product is marketed. We also draw some illustrative models to be improved as a further work.
    Keywords: advertising; snazjd model; majority model; duopoly market.
    JEL: M31 M37 C63
    Date: 2006–11–10
  19. By: Chen, Zhijun
    Abstract: This paper proposes a new approach of fighting collusion in tournaments which sheds light on the principle of divide and conquer: the principal can benefit from manipulating information revelation, by which he brings asymmetric information between the agents and thus creates a distortion of efficiency in the coalition. We employ a simple tournament setting where, due to perfect collusion, the efficient effort levels are impossible to be implemented through simple mechanisms. We propose a sophisticated mechanism with a biased promotion rule that allows the principal to manipulate the revelation of information and make asymmetric information between the agents, which brings trade-offs between rent-extraction and distortion of efficiency into the coalition. We show that, it is possible to implement efficient effort levels under the sophisticated mechanism. JEL Classification: C72, D82
    Keywords: collusion; tournament
    JEL: C72 D82
    Date: 2006–11

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