nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒12‒01
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Private Observation, Tacit Collusion and Collusion with Communication By Mouraviev, Igor
  2. Vertical differentiation, network externalities and compatibility decisions : an alternative approach By Hend Ghazzai; Rim Lahmandi-Ayed
  3. Profitability of Horizontal Mergers in Trigger Strategy Game By CESI BERARDINO
  4. The long-term operating performance of European mergers and acquisitions By Martynova,Marina; Oosting,Sjoerd; Renneboog,Luc
  5. On the Effective Design of the Efficiency Defence By Andreea Cosnita; Jean-Philippe Tropeano
  6. Market power and product quality: review of the literature By Cinzia COLAPINTO
  7. Product Market Competition, R&D Effort and Economic Growth By Alberto Bucci
  8. Competition, Imitation and Growth with Non-Diversifiable Risk By Tapio Palokangas
  9. Competing through cooperation: Standard setting in wireless telecommunications By Aija Leiponen
  10. Multimarket spatial competition in the Colombian deposit market By Dairo Estrada; Sandra Rozo
  11. Competition Fosters Trust By Steffen Huck; Gabriele K. Ruchala; Jean-Robert Tyran
  12. Contest design and optimal endogenous entry By Fu, Qiang; Lu, Jingfeng
  13. Advertising as Distortion of Learning in Markets with Network Externalities By Brekke, Kjell Arne; Rege, Mari
  14. Endogenous entry and auctions design with private participation costs By Lu, Jingfeng
  15. Should Employment Authorities Worry About Mergers and Acquisitions ? By David N. Margolis

  1. By: Mouraviev, Igor (Research Institute of Industrial Economics)
    Abstract: The paper studies the role of communication in facilitating collusion. The situation of infinitely repeated Cournot competition in the presence of antitrust enforcement is considered. Firms observe only their own production levels and a common market price. The price is assumed to have a stochastic component, so that a low price may signal either deviations from collusive output levels or a 'downward' demand shock. The firms choose between tacit collusion and collusion with communication. Communication implies that the firms meet and exchange information about past outputs and is assumed to be the only legal proof of cartel behavior. The antitrust enforcement takes the form of an exogenous probability to detect the meetings, in which case the firms are sued for cartel behavior and pay a fine. Tacit collusion is assumed to provide no grounds for the legal action but involves inefficiencies due to the lack of complete information about individual output levels. It is shown that there exists a range of discount factors where collusion with communication constitutes the most profitable collusive strategy.
    Keywords: Collusion; Communication; Private Information
    JEL: D82 L41
    Date: 2006–10–25
  2. By: Hend Ghazzai (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I], LEGI - [Ecole Polytechnique de Tunisie]); Rim Lahmandi-Ayed (LEGI - [Ecole Polytechnique de Tunisie])
    Abstract: We characterize the equilibrium of a game in vertically differentiated market which exhibits network externalities. There are two firms, an incumbent and a potential entrant. Compatibility means in our model that the inherent qualities of the goods are close enough. By choosing its quality, the entrant chooses in the same time to be compatible or not. The maximal quality difference that allows compatibility i.e the compatibility interval is chosen by the incumbent which involves costs increasing with the width of that interval. We show that in order to have two active firms at price equilibrium, the sufficient condition on the market size of a standard vertical differentiation model remains valid under compatibility. However, an additional condition on the firms' qualities is needed under incompatibility. For a small quality segment, the incumbent can block entry choosing an empty compatibility interval. At the subgame perfect equilibrium, incompatibility prevails if the quality segment is large and the compatibility costs are high. Compatibility prevails for sufficiently large quality segments and low costs of compatibility. Finally there is no entry if the quality segment is small and the compatibility costs are high.
    Keywords: Vertical differentiation, compatibility, network externalities.
    Date: 2006–11–03
    Abstract: It is shown that, in a dynamic competition, an exogenous horizontal merger is profitable even if a small share of active firms merge. However, each firm has incentive to remain outside the merger because it would benefit more (Insiders' dilemma). We show that in an infinite repeated game in which the firms use trigger strategies an exogenous bilateral merger can be profitable and the Insiders' dilemma is mitigated.
    Date: 2006–03
  4. By: Martynova,Marina; Oosting,Sjoerd; Renneboog,Luc (Tilburg University, Center for Economic Research)
    Abstract: We investigate the long-term profitability of corporate takeovers of which both the acquiring and target companies are from Continental Europe or the UK. We employ four different measures of operating performance that allow us to overcome a number of measurement limitations of the previous literature, which yielded inconsistent conclusions. Both acquiring and target companies significantly outperform the median peers in their industry prior to the takeovers, but the raw profitability of the combined firm decreases significantly following the takeover. However, this decrease becomes insignificant after we control for the performance of the peer companies which are chosen in order to control for industry, size and pre-event performance. None of the takeover characteristics (such as means of payment, geographical scope, and industry-relatedness) explain the post-acquisition operating performance. Still, we find an economically significant difference in the long-term performance of hostile versus friendly takeovers, and of tender offers versus negotiated deals: the performance deteriorates following hostile bids and tender offers. The acquirer's leverage prior takeover seems to have no impact on the post-merger performance of the combined firm, whereas the acquirer's cash holdings are negatively related to performance. This suggests that companies with excessive cash holdings suffer from free cash flow problems and are more likely to make poor acquisitions. Acquisitions of relatively large targets result in better profitability of the combined firm subsequent to the takeover, whereas acquisitions of a small target lead to a profitability decline.
    Keywords: takeovers;mergers and acquisitions;long-term operating performance; diversification;hostile takeovers;means of payment;cross-border acquisitions; private target
    JEL: G34
    Date: 2006
  5. By: Andreea Cosnita (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Jean-Philippe Tropeano (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: The efficiency defence was long delayed in the European merger control due to costly implementation issues. In this paper we argue that the upstream consequences of the efficiency defence should equally be considered, namely the improvement of the distribution of notified mergers through the incentives it provides towards more efficient mergers. First of all, we show that even if the Competition Authority may not tell apart the mergers that rightfully invoke the efficiency defence from those that do not, allowing such a procedure can lead to a lower post-merger price. Secondly, we study the impact of merger remedies on the incentives conveyed by the efficiency defence, and conclude on the optimal design of the efficiency defence procedure.
    Keywords: Merger control, efficiency defence, merger remedies.
    Date: 2006–11–13
  6. By: Cinzia COLAPINTO
    Abstract: In this paper we focus on the relation between product quality and information, which let us distinguishing search and experience goods. We show how literature has studied the way firms signalling the high quality of their products/services: introductory discount pricing, strong advertising expenditures or commitment (for instance, warranties). For search goods we consider contributions dealing with a single-product monopolist (Spence 1975, Rochet and Stole 1999, Lambertini 1998,…) and a multiproduct monopolist (Mussa and Rosen 1978), this first simple model has been used extensively by applied theorists studying regulation, auctions, and labor contracts (Katz 1984, Rochet and Stole 2002,…) For experience goods, we mention for instance the lemons model (Akerlof 1970) and no milking condition (Shapiro 1983)
    Keywords: Product quality, search goods, experience goods, advertising and reputation
    JEL: L15
    Date: 2006–11
  7. By: Alberto Bucci
    Abstract: Empirical evidence has recently pointed to the lack of any relationship between R&D intensity (variously defined and measured) and economic growth in the post-war period in the United States and other OECD countries. Using a framework that integrates human capital accumulation and purposive (horizontal) innovation activity, this paper looks at product market competition as a possible solution to this puzzle. Indeed, we find that changes in product market competition may well have no influence on human capital investment (the growth engine), while affecting R&D effort.
    Keywords: Endogenous Growth; R&D Investment; Human Capital Accumulation; Product Market Competition
    JEL: D43 J24 L16 O31 O41
    Date: 2006–06
  8. By: Tapio Palokangas
    Abstract: This paper analyzes the growth and welfare effects of competition in an endogenously-growing economy with imitation and non-diversifiable risk. The main findings are as follows. There is no imitation without positive profits during innovation races. A larger proportion of competing industries leads to slower economic growth. When competitive profits are high or low, the economy grows faster than when they are of medium size. If the government subsidizes innovation and imitation optimally, then competitive profits are positively associated with welfare. With an optimal uniform subsidy to all R&D, there is an “inverted-U” relationship between competitive profits and welfare.
    Keywords: Imitation, competition, Schumpeterian growth
    JEL: L11 L16 O31 O34
    Date: 2006–06
  9. By: Aija Leiponen
    Abstract: This study examines cooperative standard-setting in wireless telecommunications. Focusing on the competition among firms to influence formal standardization, the roles of standard-setting committees, private alliances, and technical consortia are highlighted. The empirical context is Third Generation Partnership Project (3GPP), an international standards development organization. Panel data analyses suggest that participation in external technical consortia significantly enhance firms’ contributions to the development of new specifications in 3GPP committees. Then, once a firm has become a central player in technical committees, it can further influence the standard-setting outcome through change requests to ongoing specifications. External alliances with fellow 3GPP members may also improve change request success. These results suggest that if firms in network technological industries want to influence the evolution of their industry, they should identify both formal standard-setting committees and external cooperative arrangements in which they can discuss, negotiate, and align positions on technical features with their peers. For policymakers, these results suggest that it is important to ensure that technical consortia remain open for all industry actors and that membership fees do not become prohibitive to small and resource-constraint players.
    Keywords: Standard setting, technology strategy, inter-firm networks
    JEL: L15 L41 L96 O34 O38
    Date: 2006–11–21
  10. By: Dairo Estrada; Sandra Rozo
    Abstract: This paper presents a multimarket spatial competition oligopoly model for the Colombian deposit market, in line with the New Em- pirical Industrial Organization (NEIO) approach. In this framework, banks use price and non-price strategies to compete in the market, which allows us to analyze the country and the regional competitive- ness level. The theoretical model is applied to quarterly Colombian data that covers the period between 1996 and 2005. Our results sug- gest that, although the country deposit market appears to be more competitive than the Nash equilibrium, there are some local areas within the country that present evidence of market power.
    Date: 2006–10–01
  11. By: Steffen Huck (Department of Economics, University College London); Gabriele K. Ruchala (Department of Economics, University of Erfurt); Jean-Robert Tyran (Department of Economics, University of Copenhagen)
    Abstract: We study the effects of reputation and competition in a stylized market for experience goods. If interaction is anonymous, such markets perform poorly: sellers are not trustworthy, and buyers do not trust sellers. If sellers are identifiable and can, hence, build a reputation, efficiency quadruples but is still at only a third of the first best. Adding more information by granting buyers access to all sellers’ complete history has, somewhat surprisingly, no effect. On the other hand, we find that competition, coupled with some minimal information, eliminates the trust problem almost completely.
    Keywords: experience goods; competition; reputation; trust; moral hazard; information conditions
    JEL: C72 C92 D40 L14
    Date: 2006–11
  12. By: Fu, Qiang; Lu, Jingfeng
    Abstract: This paper derives the effort-maximizing contest rule and the optimal endogenous entry in a context where potential participants bear fixed entry costs. The organizer is allowed to design the contest under a fixed budget with two strategic instruments: he sets the value of the prize purse, and arranges a monetary transfer (entry subsidy or fee) for each participating contestant. In other words, the budget can either be used to subsidize participation or an entry fee can be charged to fund the prize purse. The results show that the optimally designed contest attracts exactly two participating contestants in its unique subgame perfect equilibrium (when there is a positive fixed entry cost) and extracts all the surplus from participating contestants. The study also shows that the direction and amount of the monetary transfer depend on the magnitude of the entry cost: the contest organizer subsidizes entry when contestants bear substantial entry costs, but charges an entry fee to fund the prize purse whenever the entry cost is sufficiently low.
    Keywords: Contest; Endogenous Entry; Entry Cost; Subsidy; Entry Fee
    JEL: D7 C72
    Date: 2006–11
  13. By: Brekke, Kjell Arne (The Ragnar Frisch Centre for Economic Research); Rege, Mari (University of Stavanger)
    Abstract: We present a theory of how advertising can break a lock-in by distorting beliefs about market shares in markets with network externalities. On the background of the availability heuristic we assume that people learn about market shares by observing product adoption of others, but are not able to fully distinguish between observations of real people and …ctitious characters in advertisements. We look at a game between an incumbent and an entrant producing close substitutes. Our analysis shows that if the entrant’s product is of su¢ ciently high quality, then the entrant will use advertising in order to break the lock-in and the incumbent will not advertise at all. However, if the quality di¤erential between the two products is small, then the incumbent may advertise and make it unpro…table for the entrant to break the lock-in.
    Keywords: Advertising; availability heuristic; herding behavior; information; lock-in
    JEL: D21 L10 M37
    Date: 2006–11–23
  14. By: Lu, Jingfeng
    Abstract: This paper studies endogenous entry and ex ante revenue-maximizing auctions in an independent private value setting where potential bidders have private-information entry costs. The contribution of this paper is four-fold. First, we show that any equilibrium entry can be characterized through a set of continuous and monotonic shutdown curves that separate the bidders' types into participating and nonparticipating categories. Second, the expected winning probability of a participant does not depend on his private entry cost. Furthermore, the expected winning probabilities of the participating types are given by the slopes of the shutdown curves. Third, symmetric entry equilibria (shutdown curves) implemented by the classes of ex post efficient or ex post revenue-maximizing mechanisms are completely characterized. Fourth, within these two classes of mechanisms, a modified Vickrey auction with uniform reserve price and entry subsidy is ex ante revenue-maximizing. The desired entry subsidy and reserve price are determined by the lower end of the corresponding shutdown curve.
    Keywords: Auctions Design; Ex Post Efficiency; Endogenous Participation; Multidimensional Screening; Vickrey Auction.
    JEL: D44 D82
    Date: 2006–11
  15. By: David N. Margolis (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I], CREST - Centre de Recherche en Économie et Statistique - [INSEE] - [ École Nationale de la Statistique et de l'Administration Économique], IZA - [Institute for the Study of Labor])
    Abstract: This paper considers the role mergers and acquisitions have on employment. First, it considers the importance of different aspects of compensation policy and human resource management practices for distinguishing acquired and acquiring firms. Second, it examines which individuals from which firms remain with the newly created entity after the takeover. Using a unique employer-employee linked data set for France, we find that very few observable workforce or compensation characteristics distinguish acquired from acquiring firms ex-ante. Nevertheless, the human resources department seems to be quite active in the post-takeover period, with employees of the acquired firm being less likely to remain with the new entity in the short term after takeover than those of the acquiring firm and with the differences between the two types of firms disappearing after 3 years. The workers with characteristics that tend to be associated with the fastest subsequent job finding in the displaces worker literature are also those who tend to be overreprensented among the individuals who separate from their employer post-takeover. Finally, as both acquired and acquiring firms differ from firms not involved in takeover activity in a similar manner, employment authorities may be able to anticipate the regions in which takeovers are more likely to occur by looking at the financial accounts of firms with particular characteristics that have local establishments.
    Keywords: Employment, takeovers, linked employer-employee data.
    Date: 2006–11–06

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