nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒01‒02
23 papers chosen by
Russell Pittman
US Department of Justice

  1. Pricing and welfare implications of payment card network competition By Fumiko Hayashi
  2. Merge and Compete. Strategic incentives for vertical integration By Filippo VERGARA CAFFARELLI
  3. Alliances between competitors and consumer information By Paolo Giorgio GARELLA; Martin PEITZ
  4. Oligopoly dynamics with barriers By Jaap H. Abbring; Jeffrey R. Campbell
  5. Eat or be eaten: a theory of mergers and firm size By Gary Gorton; Matthias Kahl; Richard J. Rosen
  6. Industry Concentration and Welfare - On the Use of Stock Market Evidence from Horizontal Mergers By Fridolfsson, Sven-Olof; Stennek, Johan
  7. Taxation in Two-Sided Markets By Hans Jarle Kind; Marko Koethenbuerger; Guttorm Schjelderup
  8. When target CEOs contract with acquirers: evidence from bank mergers and acquisitions By Elijah Brewer, III; William E. Jackson, III; Larry D. Wall
  9. Academic Journals as Two-Sided Platforms: Empirical Evidence from Data on French Libraries By Dubois, Pierre; Hernandez-Perez, Adriana; Ivaldi, Marc
  10. Competition Fosters Trust By Huck, Steffen; Ruchala, Gabriele K.; Tyran, Jean-Robert
  11. How Much Collusion. A Meta-Analysis On Oligopoly Experiments By Christoph Engel
  12. Market structure and credit card pricing: what drives the interchange? By Zhu Wang
  13. Last-in first-out oligopoly dynamics By Jaap H. Abbring; Jeffrey R. Campbell
  14. Licensing Complementary Patents and Vertical Integration By Schmidt, Klaus M.
  15. Competition for Viewers and Advertisers in a TV Oligopoly By Hans Jarle Kind; Tore Nilssen; Lars Sørgard
  16. Endogenous Timing in a Mixed Duopoly and Private Duopoly - ‘Capacity- then-Quantity’ Game By Yuanzhu Lu; Sougata Poddar
  17. International Taxation and the Direction and Volume of Cross-Border M&As By Huizinga, Harry; Voget, Johannes
  18. Red Tape and Delayed Entry By Ciccone, Antonio; Papaioannou, Elias
  19. Vertical Integration and Dis-integration of Computer Firms: A History Friendly Model of the Co-evolution of the Computer and Semiconductor Industries By Franco Malerba; Richard Nelson; Luigi Orsenigo; Sidney Winter
  20. Entrepreneurship and the Process of Firms’ Entry, Survival and Growth By Enrico Santarelli; Marco Vivarelli
  21. Integración Vertical: El caso de la Explotación de Aeropuertos By Marcos Gallacher; Alfredo Sesé
  22. Les modèles de comportements adaptatifs appliqués à l'oligopole de Cournot By Pascal Billand; Christophe Bravard
  23. Electricité et gaz naturel : du monopole public à la concurrence réglementée. Une perspective historique By Jean-Pierre Angelier

  1. By: Fumiko Hayashi
    Abstract: This paper examines how competition among payment card networks—three-party scheme networks and four-party scheme networks—affects pricing as well as the welfare of various parties. A competing network has an incentive to provide rewards to its card users. By providing more generous rewards than its rival networks, the network can increase its own card transactions because multihoming cardholders—who hold multiple networks’ cards—choose to use its card instead of using its rivals’. Although a monopoly network does not have such an incentive, in a monopoly four-party scheme network, competition among card issuers likely makes issuers provide rewards. Due to rewards, the merchant fees under competition can be higher than the merchant fees set by a monopoly network, unless the majority of cardholders are multihoming. Generally, cardholding consumers are better off under network competition. In contrast, non-cardholding consumers are better off only when network competition reduces merchant fees lower than those under monopoly. The results suggest that policies that simply encourage network competition will likely increase cardholder rewards but will not necessarily lower merchant fees in the U.S. payment card market. Several empirical indicators may possibly tell which direction the U.S. payments system needs to go.
    Date: 2006
  2. By: Filippo VERGARA CAFFARELLI (Bank of Italy)
    Abstract: Vertical integration followed by quantity competition is studied. In the first stage of the game downstream firms simultaneously decide whether to integrate with one of the upstream suppliers. If firms are not able to observe whether their vertically integrated competitor enters the intermediate-good market then they are indifferent about vertical integration. If the entry choice of the integrated firm is observable then the unique equilibrium involves vertical integration and in-house production of the intermediate good. The importance of entry observability sheds light on the strategic importance of information exchange institutions such as the internet and business fairs.
    Keywords: Vertical integration, Cournot competition, Market entry
    JEL: L13 L22
    Date: 2006–12
  3. By: Paolo Giorgio GARELLA; Martin PEITZ
    Abstract: Alliances between competitors in which established firms provide access to proprietary resources, e.g. their distribution channels, are important business practices. We analyze a market where an established firm, firm A, produces a product of well-known quality, and a firm with an unknown brand, firm B, has to choose to produce high or low quality. Firm A observes firm B's quality choice but consumers do not. Hence, firm B is subject to a moral hazard problem which can potentially be solved by firm A. Firm A can accept or reject to form an alliance with firm B, which is observed by consumers. If an alliance is formed, firm A implicitly certificies the rival's product. Consumers infer that firm B is a competitor with high quality, as otherwise why would the established firm accept to form an alliance? The mechanism we discover allows for an economic interpretation of several types of business practices
    Keywords: alliances, brand sharing, asymmetric information, signaling, exclusion, moral hazard, entry assistan
    JEL: L15 L13 L24 L42 M21 M31 D43
    Date: 2006–12
  4. By: Jaap H. Abbring; Jeffrey R. Campbell
    Abstract: This paper considers the effects of raising the cost of entry for potential competitors on infinite-horizon Markov- perfect industry dynamics with ongoing demand uncertainty. All entrants serving the model industry incur sunk costs, and exit avoids future fixed costs. We focus on the unique equilibrium with last- in first-out expectations: a firm never exits before a younger rival does. When an industry can support at most two firms, we prove that raising barriers to a second producer’s entry increases the probability that some firm will serve the industry and decreases its long-run entry and exit rates. In numerical examples with more than two firms, imposing a barrier to entry stabilizes industry structure.
    Date: 2006
  5. By: Gary Gorton; Matthias Kahl; Richard J. Rosen
    Abstract: We propose a theory of mergers that combines managerial merger motives and a regime shift that may lead to some value- increasing merger opportunities. Anticipation of the regime shift can lead to mergers, either for defensive or positioning reasons. Defensive mergers occur when managers acquire other firms to avoid being acquired themselves. Mergers may also allow a firm to position itself as a more attractive takeover target and earn a takeover premium. The identity of acquirers and targets and the profitability of acquisitions depend, among other factors, on the distribution of firm sizes within an industry.
    Date: 2006
  6. By: Fridolfsson, Sven-Olof; Stennek, Johan
    Abstract: There is diverging empirical evidence on the competitive effects of horizontal mergers: consumer prices (and thus presumably competitors' profits) often rise while competitors' share prices fall. Our model of endogenous mergers provides a possible reconciliation. It is demonstrated that anticompetitive mergers may reduce competitors' share prices, if the merger announcement informs the market that the competitors' lost a race to buy the target. Also the use of 'first rumour' as an event may create similar problems of interpretation. We also indicate how the event-study methodology may be adapted to identiy competitive effects and thus, the welfare consequences for consumers.
    Keywords: antitrust; coalition formation; event studies; in-play; mergers & acquisitions
    JEL: G14 G34 L12 L41
    Date: 2006–12
  7. By: Hans Jarle Kind; Marko Koethenbuerger; Guttorm Schjelderup
    Abstract: Two-sided platform firms serve distinct customer groups that are connected through interdependent demand, and include major businesses such as the media industry, banking, and the software industry. A well known textbook result in one-sided markets is that a government may increase a monopolist's output and reduce the deadweight loss by subsidizing output. The present paper shows that this result need not hold in a two-sided market. On the contrary, a higher ad-valorem tax rate - rather than a subsidy - could increase output and enhance welfare.
    Keywords: two-sided markets, ad-valorem taxes, specific taxes, imperfect competition, industrial organization
    JEL: D40 D43 H21 H22 L13
    Date: 2006
  8. By: Elijah Brewer, III; William E. Jackson, III; Larry D. Wall
    Abstract: This paper investigates the impact of the target chief executive officer’s (CEO) postmerger position on the purchase premium and target shareholders’ abnormal returns around the announcement of the deal in a sample of bank mergers during the period 1990–2004. We find evidence that the target shareholders’ returns are negatively related to the postmerger position of their CEO. However, these lower returns are not matched by higher returns to the acquirer’s shareholders, suggesting little or no wealth transfers. Additionally, our evidence suggests that the target CEO becoming a senior officer of the combined firm does not boost the overall value of the merger transaction.
    Date: 2006
  9. By: Dubois, Pierre; Hernandez-Perez, Adriana; Ivaldi, Marc
    Abstract: This paper analyzes the demand and cost structure of the French market of academic journals, taking into account its intermediary role between researchers, who are both producers and consumers of knowledge. This two sidedness feature will echoes similar problems already observed in electronic markets - payment card systems, video game consoles, etc. - such as the chicken and egg problem, where readers won’t buy a journal if they do not expect its articles to be academically relevant and researchers, that live under the mantra 'Publish or Perish', will not submit to a journal with either limited public reach or weak reputation. After the merging of several databases, we estimate the aggregated nested logit demand system combined simultaneously with a cost function. We identify the structural parameters of this market and find that price elasticities of demand are quite large and margins relatively low, indicating that this industry experiences competitive constraints.
    Keywords: differentiated products models; media industry; two-sided platforms
    JEL: L11 L82
    Date: 2006–12
  10. By: Huck, Steffen; Ruchala, Gabriele K.; Tyran, Jean-Robert
    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: moral hazard; competition; experience goods; information conditions; reputation; trust
    JEL: C72 C92 D40 L14
    Date: 2006–12
  11. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Oligopoly has been among the first topics in the experimental economics. Over half a century, some 150 papers have been published. Each individual paper was interested in demonstrating one effect. But in order to do so, experimenters had to specify many more parameters. That way they have generated a huge body of evidence, untapped thus far. This meta-analysis makes this evidence available. More than 100 of the papers lend themselves to calculating an index of collusion. The data bank behind this paper covers some 700 different settings. The experimental results may be normalised as a percentage of the span between the Walrasian and the Pareto outcomes. The same way, results may be expressed as a percentage of the distance between the Nash and the Pareto outcomes. For each and every of the parameters, these two indices make it possible to answer two questions: how far is the market outcome away from the competitive equilibrium? And how good is the Nash prediction? Most importantly, however, the meta-analysis sheds light on how features of the experimental setting interact with each other. Most main effects and many interaction effects are indeed statistically significant.
    Keywords: oligopoly, collusion, unilateral effect, experiment
    JEL: C91 D21 D43 K21 L13 L41
    Date: 2006–12
  12. By: Zhu Wang
    Abstract: This paper presents a model for the credit card industry, where oligopolistic card networks price their products in a complex marketplace with competing payment instruments, rational consumers/merchants, and competitive card issuers/acquirers. The analysis suggests that card networks demand higher interchange fees to maximize card issuers' profits as card payments become more efficient. At equilibrium, consumer rewards and card transaction volume also increase, while consumer surplus and merchant profits may not. The model provides a unified framework to evaluate credit card industry performance and government interventions.
    Date: 2006
  13. By: Jaap H. Abbring; Jeffrey R. Campbell
    Abstract: This paper extends the static analysis of oligopoly structure into an infinite- horizon setting with sunk costs and demand uncertainty. The observation that exit rates decline with firm age motivates the assumption of last-in first- out dynamics: An entrant expects to produce no longer than any incumbent. This selects an essentially unique Markov-perfect equilibrium. With mild restrictions on the demand shocks, a sequence of thresholds describes firms’ equilibrium entry and survival decisions. Bresnahan and Reiss’s (1993) empirical analysis of oligopolists’ entry and exit assumes that such thresholds govern the evolution of the number of competitors. Our analysis provides an infinite-horizon game- theoretic foundation for that structure.
    Date: 2006
  14. By: Schmidt, Klaus M.
    Abstract: In this paper we investigate the pricing incentives of IP holders and compare the equilibrium royalty rates charged by vertically integrated IP holders with those of non- integrated IP holders. We show that under many circumstances non-integrated companies are likely to charge lower royalties than their vertically integrated counterparts. The results of this paper are of special relevance for the analysis of competition in CDMA and WCDMA technology licensing, where some IP holders are not vertically integrated into handset and infrastructure manufacturing, while others are.
    Keywords: complementary patents; IP rights; licensing; vertical integration
    JEL: D43 L15 L41
    Date: 2006–12
  15. By: Hans Jarle Kind; Tore Nilssen; Lars Sørgard
    Abstract: We consider a model of a TV oligopoly where TV channels transmit advertising and viewers dislike such commercials. We show that advertisers make a lower profit the larger the number of TV channels. If TV channels are sufficiently close substitutes, there will be underprovision of advertising relative to social optimum. We also find that the more viewers dislike ads, the more likely it is that welfare is increasing in the number of advertising financed TV channels. A publicly owned TV channel can partly correct market distortions, in some cases by having a larger amount of advertising than private TV channels. It may even have advertising in cases where advertising is wasteful per se.
    Keywords: television industry, advertising
    JEL: L82 M37
    Date: 2006
  16. By: Yuanzhu Lu (China Economics and Management Academy, Central University of Finance and Economics); Sougata Poddar (Department of Economics, National University of Singapore)
    Abstract: We consider a game of endogenous timing of sequential choice of capacity and quantity with observable delay in a mixed duopoly and a private duopoly under two possible time structures. In mixed duopoly, we find that a simultaneous play at the capacity stage or at the quantity stage can never be supported as subgame perfect Nash equilibrium (SPNE); whereas a simultaneous play at each stage turns out to be the unique SPNE in a private duopoly. In mixed duopoly there is multiplicity of equilibria and all SPNEs require sequentiality at the capacity as well as quantity stage. These equilibrium outcomes are invariant with respect to the endogenous time structures. In this context, we also show that the public firm never chooses over (excess) capacity in mixed duopoly, while the private firm never chooses under capacity in both mixed and private duopoly.
    Keywords: Endogenous timing, public firm, private firm, over capacity, under capacity
    JEL: L13 D43 H42
  17. By: Huizinga, Harry; Voget, Johannes
    Abstract: In an international merger or acquisition, the national residences of the acquirer and the target determine to what extent the newly created multinational firm is subject to international double taxation. This paper presents evidence that the parent-subsidiary structure of newly created multinational firms reflects the prospect of international double taxation. The number of acquiring firms at the national level similarly reflects international double taxation. The evidence suggests that tax policy in the form of lower tax rates or the elimination of residence-based worldwide taxation attracts additional parent companies of multinational firms. On the basis of our estimation, we simulate the impact of the elimination of worldwide taxation by the United States on parent firm selection.
    Keywords: international taxation; mergers and acquisitions
    JEL: F23 H25
    Date: 2006–12
  18. By: Ciccone, Antonio; Papaioannou, Elias
    Abstract: Does cutting red tape foster entrepreneurship in industries with the potential to expand? We address this question by combining the time needed to comply with government entry procedures in 45 countries with industry-level data on employment growth and growth in the number of establishments during the 1980s. Our main empirical finding is that countries where it takes less time to register new businesses have seen more entry in industries that experienced expansionary global demand and technology shifts. Our estimates take into account that proxying global industry shifts using data from only one country--or group of countries with similar entry regulations--will in general yield biased results.
    Keywords: entry; entry regulation; globally expanding industries
    JEL: E6 F43 L16
    Date: 2006–12
  19. By: Franco Malerba; Richard Nelson; Luigi Orsenigo; Sidney Winter
    Abstract: In this paper we present a history-friendly model of the changing vertical scope of computer firms during the evolution of the computer and semiconductor industries. The model is "history friendly", in that it attempts at replicating some basic, stylized qualitative features of the evolution of vertical integration on the basis of the causal mechanisms and processes which we believe can explain the history. The specific question addressed in the model is set in the context of dynamic and uncertain technological and market environments, characterized by periods of technological revolutions punctuating periods of relative technological stability and smooth technical progress. The model illustrates how the patterns of vertical integration and specialization in the computer industry change as a function of the evolving levels and distribution of firms’ capabilities over time and how they depend on the co-evolution of the upstream and downstream sectors. Specific conditions in each of these markets - the size of the external market, the magnitude of the technological discontinuities, the lock-in effects in demand - exert critical effects and feedbacks on market structure and on the vertical scope of firms as time goes by. Length 32 pages
    Date: 2006–12
  20. By: Enrico Santarelli (University of Bologna, Max Planck Institute of Economics Jena, ENCORE Amsterdam, and IZA Bonn); Marco Vivarelli (Università Cattolica Piacenza, CSGR Warwick, Max Planck Institute of Economics Jena, and IZA Bonn)
    Abstract: This survey paper aims at critically discussing the recent literature on firm formation and survival and the growth of new-born firms. The basic purpose is to single out the microeconomic entrepreneurial foundations of industrial dynamics (entry and exit) and to characterise the founder’s ex-ante features in terms of likely ex-post business performance. The main conclusion is that entry of new firms is heterogeneous with innovative entrepreneurs being found together with passive followers, over-optimist gamblers and even escapees from unemployment. Since founders are heterogeneous and may make "entry mistakes", policy incentives should be highly selective, favouring nascent entrepreneurs endowed with progressive motivation and promising predictors of better business performance. This would lead to the least distortion in the post-entry market selection of efficient entrepreneurs.
    Keywords: entrepreneurship, new firm, survival, post-entry performance
    JEL: L10 M13
    Date: 2006–12
  21. By: Marcos Gallacher; Alfredo Sesé
    Abstract: The provision of airport services results in a web of contractual relationships between the main contractor and other firms. The existence of multiple services offered in airports allows several contractual alternatives to be chosen. In particular, the main contractor may choose to carry out these under his own management (“vertical integration”) or alternatively transfer them so they are under the control of another firm (“dis-integration”). The advantages of either alternatives depends on a host of factors. This paper analyzes the impact on vertical integration of: (a) difficulties in controlling labor and (b) the need for specialized knowledge on specific business processes. The paper shows that, in general, the decision to integrate a process is inversely related to the above two factors. The paper also analyzes the relevance of dis-integration as a tool for the reduction of business risks. We find that – for this industry – decisions relative to dis-integration do not appear to be justified as a tool for managing risks (income variability) of the firm.
    JEL: L2 D2 L8
    Date: 2006–12
  22. By: Pascal Billand (CREUSET (EA 3724) - Centre de Recherche Economique de l'Université de Saint Etienne - [Université Jean Monnet - Saint-Etienne]); Christophe Bravard (CREUSET (EA 3724) - Centre de Recherche Economique de l'Université de Saint Etienne - [Université Jean Monnet - Saint-Etienne])
    Abstract: Ce papier s'intéresse à un jeu d'oligopole “à la Cournot” récurrent, où les firmes adaptent leur quantité en imitant les meilleurs stratégies présentes dans leur mémoire. Il s'agit de déterminer les états stochastiquement stables. Plusieurs approches sont présentées pour traiter cette question. Elles se distinguent par le contenu de la mémoire des firmes. Nous notons que cette mémoire joue un rôle clé dans la sélection des états stochastiquement stables. Il apparaît que l'équilibre de Cournot-Nash n'est généralement pas l'unique état stochastiquement stable, voire n'appartient pas à l'ensemble des états stochastiquement stables.
    Keywords: Imitation, Oligopole de Cournot, jeux évolutionnaires
    Date: 2006–12–21
  23. By: Jean-Pierre Angelier
    Abstract: Les industries de l'électricité et du gaz naturel, en France comme dans la plupart des pays, ont tout d'abord été constituées en monopoles publics. Depuis la seconde guerre mondiale, EDF et GDF ont ainsi rempli leurs missions de doter la France d'une industrie électrique et d'une industrie gazières toutes les deux efficaces.<br />Cette structure est toutefois remise en cause du fait d'un nouvel environnement concurrentiel de ces industries : la concurrence est introduite dans l'offre, les réseaux de transport et distribution restent monopoles publics, le tout étant placé sous la surveillance d'une Commission de Régulation de l'Energie.<br />Des transactions économiques nouvelles apparaissent désormais à trois niveaux : sur le marché de gros de l'électricité et du gaz ; pour ce qui est de l'accès de tiers aux réseaux de transport et de distribution ; les modalités d'achat concurrentiel d'électricité et de gaz par le consommateur final.<br />La nouvelle organisation institutionnelle de ces industries est-elle plus efficace que l'ancienne ?
    Date: 2006–12–18

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