nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒12‒09
ten papers chosen by
Russell Pittman
US Department of Justice

  1. How Market Fragmentation Can Facilitate Collusion By Kühn, Kai-Uwe
  2. Experts vs. discounters: consumer free riding and experts withholding advice in markets for credence goods By Uwe Dulleck; Rudolf Kerschbamer
  3. Too Many or Too Few Varieties? The Role of Multiproduct Firms By Caminal, Ramón
  4. Merger Negotiations and Ex-Post Regret By Gärtner, Dennis; Schmutzler, Armin
  5. Mixed Competition and Welfare under Various Nonprofit Objectives Mixed Competition under Various Cost Configurations By Petra Brhlikova
  6. Horizontal Innovation-Based Growth and Product Market Competition By Alberto Bucci; Carmelo Parello
  7. Trade Policy, Market Leaders and Endogenous Competition Intensity By Jan Boone; Delia Ionascu; Kresimir Zigic
  8. Endogenous Mode of Competition in General Equilibrium By Neary, J Peter; Thakaran, Joe
  9. Mergers of Equals and Unequals By Valerie Smeets; Kathryn Ierulli; Michael Gibbs
  10. Entry of Foreign Banks and their Impact on Host Countries By Lehner, Maria; Schnitzer, Monika

  1. By: Kühn, Kai-Uwe
    Abstract: When regulated markets are liberalized, economists always stress the benefits of fragmenting existing capacities among more firms. This is because oligopoly models typically imply that a larger number of firms generates stronger competition. I show in this paper that this intuition may fail under collusion. When individual firms are capacity constrained relative to total demand, the fragmentation of capacity facilitates collusion and increases the highest sustainable collusive price. This result can explain the finding in Sweeting (2005) that dramatic fragmentation of generation capacity in the English electricity industry led to increasing price cost margins.
    Keywords: Bertrand-Edgeworth competition; collusion; industry restructuring; market fragmentation
    JEL: J1 J11
    Date: 2006–11
  2. By: Uwe Dulleck (Department of Economics, Johannes Kepler University Linz, Austria); Rudolf Kerschbamer (Department of Economics, University of Innsbruck, Austria)
    Abstract: This paper studies price competition between experts and discounters in a market for credence goods. While experts can identify a consumer’s problem by exerting costly but unobservable diagnosis effort, discounters just sell treatments without giving any advice. The unobservability of diagnosis effort induces experts to use their tariffs as signaling devices. This makes them vulnerable to competition by discounters. We explore the conditions under which experts survive competition by discounters and find that there exist situations in which adding a single customer to a large population of existing consumers leads to a switch from an experts only to a discounters only market. We also discuss whether vertical restraints can alleviate these inefficiencies.
    Keywords: Experts; Discounters; Credence Goods; Vertical Restraints
    JEL: L15 D82 D40
    Date: 2005–09
  3. By: Caminal, Ramón
    Abstract: The goal of this paper is to examine the role of multiproduct firms in the market provision of product diversity. The analysis is conducted within the spatial model of nonlocalized competition proposed by Chen and Riordan (2006). It turns out that the effect of multiproduct firms on product diversity depends on the size distribution of firms. Under duopoly, product diversity is lower than under monopolistic competition. Nevertheless, the number of varieties can still be socially excessive. In contrast, if a large multiproduct firm (incumbent monopolist) competes against a large number of small (single product) firms then product diversity is higher than under monopolistic competition. Moreover, the incumbent firm is unable to monopolize the market and deter entry.
    Keywords: monopolistic competition; multiproduct firms; product diversity; spatial models
    JEL: D43 L12 L13
    Date: 2006–11
  4. By: Gärtner, Dennis; Schmutzler, Armin
    Abstract: We consider a setting in which two potential merger partners each possess private information pertaining both to the profitability of the merged entity and to stand-alone profits, and investigate the extent to which this private information makes ex-post regret an unavoidable phenomenon in merger negotiations. To this end, we consider ex-post mechanisms, which use both players' reports to determine whether or not a merger will take place and what each player will earn in each case. When the outside option of at least one player is known, the efficient merger decision can be implemented by such a mechanism under plausible budget-balance requirements. When neither outside option is known, we show that the potential for regret-free implementation is much more limited, unless the budget balance condition is relaxed to permit money-burning in the case of false reports.
    Keywords: asymmetric information; efficient mechanisms; interdependent valuations; mechanism design; mergers
    JEL: D82 G34 L10
    Date: 2006–11
  5. By: Petra Brhlikova
    Abstract: I study the competition between one nonprofit and one for-profit firm under various objective functions of the nonprofit firm. The two firms optimize their objectives with respect to quality and price of their products. The nonprofit firm serves one-half of the market under pure quality maximization, while it serves about twothirds under two other objective functions that in addition to quality, include market share. In contrast, the market share and profit of the for-profit firm decrease, and consumer and total surplus increase. For the case of quality maximization pursued by the nonprofit firm, I derive equilibria for several cost configurations. Qualities and prices offered depend on the steepness of the cost function as well as on the proportion between fixed and variable costs.
    Keywords: Nonprofit, For-profit, Competition
    JEL: L21 L31 L11
    Date: 2006–10
  6. By: Alberto Bucci (Department of Economics, Business and Statistics, University of Milan); Carmelo Parello (Catholic University of Louvain)
    Abstract: The influence of the degree of competition in the goods market on growth is analyzed by developing an endogenous growth model with horizontal innovation. Product market competition is measured by (1- Lerner index) and depends on both the share of factor inputs in total income and on the elasticity of substitution across goods. We find that the shape of the relationship between competition and growth can change dramatically according to which proxy of competition is used. We interpret our results in terms of the interplay between the resource allocation and the profit incentive effects.
    Keywords: Innovation, Product Market Competition, Endogenous Growth, Scale Effects,
    Date: 2006–07–18
  7. By: Jan Boone; Delia Ionascu; Kresimir Zigic
    Abstract: It is well known that tariff policy can alleviate the negative consequences of breaching intellectual property rights by foreign firms. Yet, the positive effect of tariff protection is thought to be the benefit firms get at the expense of consumers (at least in the short run). Using a set-up in which the intensity of market competition is endogenous, we argue that consumers can benefit from tariffs even in the short run. A high level of tariff protection alters the firms’ cost efficiency distribution and induces tougher market competition. Consumers benefit from the tariff policy, and governments that assign a high enough weight to the consumer surplus set positive tariff levels. Under protection the innovation level remains the same as under free trade but the average industry efficiency increases.
    Keywords: Tariff protection, supergames, cost asymmetries, market conduct, leadership, consumer welfare
    JEL: F12 F13
    Date: 2006–10
  8. By: Neary, J Peter; Thakaran, Joe
    Abstract: This paper endogenises the extent of intra-sectoral competition in a multi-sectoral model of oligopoly in general equilibrium. Firms choose capacity followed by prices. If the benefits of capacity investment in a given sector are below a threshold level, the sector exhibits Bertrand behaviour, otherwise it exhibits Cournot behaviour. By endogenising the threshold parameter in general equilibrium, we show how exogenous shocks alter the mix of sectors between 'more' and 'less' competitive, or Bertrand and Cournot. The model also has implications for the effects of trade liberalisation and technological change on the relative wages of skilled and unskilled workers.
    Keywords: Bertrand and Cournot competition; GOLE (General Oligoplistic Equilibrium); Kreps-Scheinkman; market integration
    JEL: F10 F12 L13
    Date: 2006–11
  9. By: Valerie Smeets (Universidad Carlos III de Madrid and CCP); Kathryn Ierulli (University of Chicago); Michael Gibbs (University of Chicago and IZA Bonn)
    Abstract: We examine the dynamics of post-merger organizational integration. Our basic question is whether there is evidence of conflict between employees from the two merging firms. Such conflict can arise for several reasons, including firm-specific human capital, corporate culture, power, or favoritism. We examine this issue using a sample of Danish mergers. Controlling for other effects, employees from the acquirer fare better than employees from the acquired firm, suggesting that they have greater power in the newly merged hierarchy. As a separate effect, the more that either firm dominates the other in terms of number of employees, the better do its employees fare compared to employees from the other firm. This suggests that majority / minority status is also important to assimilation of workers, much as in ethnic conflicts. Finally, greater overlap of pre-merger operations decreases turnover. This finding is inconsistent with the view that workers of the two firms substitute for each other, creating efficiencies from merger. However, that result and our other findings are consistent with the view that more similar workers (in terms of either firm- or industry-specific human capital) are easier to integrate post merger.
    Keywords: mergers, internal organization, conflicts
    JEL: M5 G34 J63 M14
    Date: 2006–11
  10. By: Lehner, Maria; Schnitzer, Monika
    Abstract: Foreign bank entry is frequently associated with spillover effects for local banks and increasing competition in the local banking market. We study the impact of these effects on host countries. In particular, we ask how these effects interact and how they depend on the competitive environment of the host banking market. An increasing number of banks is more likely to have positive welfare effects the more competitive the market environment, whereas spillovers are less likely to have positive welfare effects the stronger competition. Hence, competitive effects seem to reinforce each other, while spillovers and competition tend to weaken each other.
    Keywords: competition in banking; foreign bank entry; multinational bank; spillovers
    JEL: F37 G21 L13 O16
    Date: 2006–11

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