nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒01‒14
twenty-two papers chosen by
Russell Pittman
US Department of Justice

  1. Competition, Monopoly Maintenance, and Consumer Switching Costs By Morita, Hodaka; Waldman, Michael
  2. Product Market Competition and Agency Costs By Baggs, Jennifer; de Bettignies, Jean-Etienne
  3. Mergers, Litigation and Efficiency By Oliver Gürtler; Matthias Kräkel
  4. An Experiment on Spatial Price Competition By Henrik Orzen; Martin Sefton
  5. Static inefficiency of compulsory licensing: quantity vs. price competition By Cugno Franco; Ottoz Elisabetta
  6. Do Process Innovations Induce Product Ones? By Maria Rosa Battaggion; Piero Tedeschi
  7. Code-sharing and its effect on airline fares and welfare By Achim I. Czerny
  8. Vertical Governance between Airlines and Airports – A Transaction Cost Analysis By Johannes Fuhr; Thorsten Beckers
  9. Identifying behaviour in a multiproduct oligopoly: Incumbents reaction to tariffs dismantling By Jaumandreu, Jordi; Moral, Maria Jose
  10. A Modified Yardstick Competition Mechanism By Georg Meran; Christian von Hirschhausen
  11. Acquisition versus greenfield: The impact of the mode of foreign bank entry on information and bank lending rates By Sophie Claeys; Christa Hainz
  12. Is there a single frontier in a single European banking market? By Jaap W. B. Bos; Heiko Schmiedel
  13. Broadband Internet: Net Neutrality versus Open Access By Christiaan Hogendorn
  14. Economies of Scale and Spatial Scope in the European Airline Industry By Manuel Romero-Hernandez; Hugo Salgado
  15. Do Dutch Musea Compete Or Cooperate? By Thomas De Graaff; Jaap Boter; Jan Rouwendal
  16. Jostling for Advantage: Licensing and Entry into Patent Portfolio Races By Ralph Siebert; Georg von Graevenitz
  17. Should Employment Authorities Worry About Mergers and Acquisitions ? By David Margolis
  18. Uniform pricing and social welfare By Bertoletti, Paolo
  19. (De)regulation of the European Ramp Handling Market – Lessons to Be Learned from an Institutional Perspective? By Johannes Fuhr
  20. Analysis of a liberalised German Gas Market By Philipp Scheib; Frieder Kalisch; Bernhard Graeber
  21. Technology, Innovation and Latecomer Strategies: Evidence from the Mobile Handset Manufacturing Sector in China By Kingsley E. Haynes; Lei Ding
  22. Does Competition for the Field Improve Cost Efficiency? Evidence from the London Bus Tendering Model By Miguel Amaral; Stéphane Saussier; Anne Yvrande-Billon

  1. By: Morita, Hodaka; Waldman, Michael
    Abstract: Significant attention has been paid to why a durable-goods producer with little or no market power would monopolize the maintenance market for its own product. This paper provides an explanation for this practice that is based on consumer switching costs and the choice of consumers between maintaining and replacing used units. In our explanation, if a firm does not monopolize the maintenance market for its own product, then consumers sometimes maintain used units when it would be efficient for the units to be replaced. In turn, the return to monopolizing the maintenance market is that the practice allows the firm to avoid this inefficiency. An interesting aspect of our analysis that has significant public-policy implications is that, in contrast to most previous explanations for why a durable-goods producer with little or no market power would monopolize the maintenance market for its own product, in our explanation the practice increases rather than decreases both social welfare and consumer welfare.
    Keywords: durable goods; aftermarkets; switching costs
    JEL: L12 L41
    Date: 2006–11
  2. By: Baggs, Jennifer; de Bettignies, Jean-Etienne
    Abstract: We model the effects of product market competition on agency costs, and develop two main empirical predictions. First, competition, by reducing agency costs, unambiguously increases the importance firms place on quality improvements. This leads to higher powered incentives, and in turn to increased effort and quality. Second, these effects are increasing in the severity of agency problems, and should be stronger in large, hierarchical corporations (where agency problems are more severe) than in entrepreneurial firms. We test the predictions of our model using a unique dataset with both firm and employee characteristics.
    Keywords: Labour, Employers, Salaries and wages, Work arrangements
    Date: 2006–12–04
  3. By: Oliver Gürtler (Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany. tel: +49-228-739214, fax: +49-228-739210.; Matthias Kräkel (Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany. tel: +49-228-739211, fax: +49-228-739210.
    Abstract: We consider antitrust enforcement within the adversarial model used by the United States. We show that, under the adversarial system, the Antitrust Authority may try to prohibit mergers also in those cases in which litigation is inefficient. Even if market concentration and technological disadvantages lead to a significant welfare reduction after merger, from society’s perspective the agency’s lawsuit may be inefficient. We can show that these inefficiencies may be aggravated if the takeover is hostile.
    Keywords: hostile takeover; litigation contest, merger
    JEL: D43 K21 L40
    Date: 2006–12
  4. By: Henrik Orzen (School of Economics, University of Nottingham); Martin Sefton (School of Economics, University of Nottingham)
    Abstract: We conduct an experiment on price competition in a segmented market. Each segment contains one seller and one consumer, and consumers incur transportation costs when they buy from a seller located in another segment. We observe persistent price dispersion in our experimental markets with the implication that consumers frequently switch suppliers. We find that larger markets are more competitive, and that competitive pressures in large markets preclude sellers from exploiting higher consumers’ willingness to pay. We compare laboratory outcomes against several theoretical benchmarks. We find that mixed strategy equilibrium predictions from the analysis of a static model perform better than alternative benchmarks in organizing the data.
    Keywords: Spatial Price Competition; Price Dispersion; Experiments
    JEL: C72 C92
    Date: 2006–09
  5. By: Cugno Franco (University of Turin); Ottoz Elisabetta (University of Turin)
    Abstract: A common argument against compulsory licensing of intellectual property maintains that it facilitates the entry of inefficient producers, which may reduce social welfare independently of any effects on R&D incentives. We study the issue in a model where the innovative firm, under the threat of compulsory licensing, react strategically by choosing between quantity and price competition. We show that the risk of a reduction in static welfare due to the entry of highly inefficient firms is avoided if licensing entails a royalty per unit of output and zero fixed fee. The rationale behind this result lies in the fact that compulsory licensing threat works as a disciplining device to improve static social welfare, even when the applicant is a high cost inefficient firm.
    Date: 2006–06
  6. By: Maria Rosa Battaggion (Department of Economics, University of Bergamo); Piero Tedeschi (Department of Statistics, University of Milan-Bicocca)
    Abstract: We study the relationship between process and product innovations in vertically differentiated duopolies. A process innovation can lead two competing firms to improve the quality of their goods introducing a product innovation. In fact, a cost reducing innovation has two effects: it spurs production and it enhances price competition. The former effect induces both firms to increase quality. The latter encourages differentiation, inducing low quality firm to decrease it. Therefore, high quality firm always improves its quality, while the other may or may not. The prevailing effect depends on the nature of quality costs (fixed or variable).
    Date: 2006–05
  7. By: Achim I. Czerny (Workgroup for Infrastructure Policy (WIP), Technische Universität Berlin)
    Abstract: Airlines frequently use code-share agreements allowing them to market seats on flights operated by partner airlines. Current studies argue that with complementary networks this generates positive welfare effects because fares for interline passengers who rely on the service of multiple airlines are supposed to fall. However, with codeshare agreements airlines can price discriminate between interline and other passengers. This might harm the latter which has been ignored so far. We show that code-share agreements can lead to welfare losses in the case of complementary networks.
    Keywords: Airlines, alliances, code-share agreements, antitrust immunity, price discrimination
    JEL: D01 L13 L41 L51 L93
  8. By: Johannes Fuhr (Workgroup for Infrastructure Policy (WIP), Technische Universität Berlin); Thorsten Beckers (Workgroup for Infrastructure Policy (WIP), Technische Universität Berlin)
    Abstract: With airport privatization and infrastructure expansion projects taking place in the liberalized European air transport market, airport and airline companies are critically reevaluating their vertical governance structures. This paper analyzes the comparative efficiency of vertical governance structures in the airport-airline supply relationship. Using transaction cost economics as the lens of analysis, we develop propositions and present supporting qualitative case studies. Our propositions state that hub airlines and hub airports seek specialized governance structures, while value-based carriers and base airports enter into long-term contracts supported by complementary safeguards. These privately crafted governance modes complement or even replace external regulation.
    Keywords: vertical integration, transaction cost, airlines, airports, competition
    JEL: L22 D23 L93
  9. By: Jaumandreu, Jordi; Moral, Maria Jose
    Abstract: The Spanish automobile market of the nineties experienced a perfectly foreseeable tariff dismantling and a strong demand downturn, with the observed result of an apparently sharpened producer competition in products and perhaps in prices. This paper is aimed at testing whether or not there really was a change in pricing behaviour, using a structural model of competition. To answer that question, we specify, estimate and test semiparametric pricing equations with panel data for 164 models belonging to the 31 firms which competed in the market. The specification includes several equilibriums as alternative estimating models, considering prominently tacit coalitions by which a group of firms sets prices, taking into account the cross effects on their demands. The statistical test selects as the best model given the data an unbroken coalition of domestic and European producers. Comparative results using tight demand side specifications show that an inadequate specification of the demand side may induce wrong inferences.
    Keywords: behaviour; tariffs; oligopoly; coalition;
    JEL: L13
    Date: 2006
  10. By: Georg Meran (DIW Berlin (German Institute for Economic Research)); Christian von Hirschhausen (Chair of Energy Economics and Public Sector Management, Technische Universität Dresden)
    Abstract: This paper analyzes a modified yardstick competition mechanism (MYC), where the yardstick employed consists of a tariff basket and total costs. This mechanism has a significant information advantage: the regulator ”only” needs to observe total costs and output of all firms. The modified yardstick competition mech- anism can ensure a socially optimal outcome when allowing for spatial and second degree price discrimination, without increas- ing the informational requirements. We also introduce regulatory lags in the model. A systematic comparison between the results of traditional yardstick regulation and modified yardstick regu- lation is carried out. Finally, we discuss the applicability of the mechanism.
    Keywords: regulation, yardstick competition, mechanism design, information asymmetry
    JEL: L51 L11 D40
  11. By: Sophie Claeys (Research Division, Sveriges Riksbank, SE-103 37 Stockholm and Ghent University, W. Wilsonplein 5D, B-9000 Ghent.; Christa Hainz (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich.
    Abstract: Policy makers often decide to liberalize foreign bank entry but at the same time restrict the mode of entry. We study how different entry modes affect the interest rate for loans in a model in which domestic banks possess private information about their incumbent clients but foreign banks have better screening skills. Our model predicts that competition is stronger if market entry occurs through a greenfield investment and therefore domestic banks' interest rates are lower. We find empirical support for our results for a sample of banks from ten Eastern European countries for the period 1995-2003.
    Keywords: banking, foreign entry, mode of entry, interest rate, asymmetric information
    JEL: G21 D4 L31
    Date: 2006–11
  12. By: Jaap W. B. Bos (Corresponding author: Utrecht School of Economics, Utrecht University, Vredenburg 138, 3511 BG, Utrecht, The Netherlands.); Heiko Schmiedel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper attempts to estimate comparable efficiency scores for European banks operating in the Single Market in the EU. Using a data set of more than 5000 large commercial banks from all major European banking markets over the period 1993-2004, the application of meta-frontiers enables us to assess the existence of a single and integrated European banking market. We find evidence in favor of a single European banking market characterized by cost and profit meta-frontiers. However, compared to the meta-frontier estimations, pooled frontier estimations tend to underestimate efficiency levels and correlate poorly with country-specific frontier efficiency ranks. JEL Classification: G21, L11, L22, L23.
    Keywords: X-efficiency, stochastic frontiers, banking, meta-frontiers, technology gap ratios.
    Date: 2006–12
  13. By: Christiaan Hogendorn (Economics Department, Wesleyan University)
    Abstract: “Network neutrality” and “open access” are two policies designed to preserve openness on the Internet. Open access mandates openness of conduits (e.g. television cable and DSL) to service providers (e.g. America Online), while network neutrality mandates openness to advanced content (streaming video, interactive e-commerce, etc.). We develop a systems model with free entry and competition in all three industry segments (conduits, service provider intermediaries, and content) and examine the effects of the two types of regulation. We find that open access does not necessarily result in more openness of content and is not a substitute for network neutrality.
    Keywords: network neutrality, open access, broadband
    JEL: L1 L5 L9
    Date: 2006–09–15
  14. By: Manuel Romero-Hernandez; Hugo Salgado
    Abstract: In this article we use four different indices to measure cost performance of the European Airline Industry. By using the number of routes as an indicator of Network Size, we are able to estimate indicators of Economies of Scale and Spatial Scope. By estimating total and variable cost functions we are also able to calculate an index of the excess capacity of the firms. For this purpose, we use data from the years 1984 to 1998, a period during which several deregulation measures were imposed on the European airline industry. Some of the implications of this deregulation process for the cost performance of the industry are presented and discussed. Our results suggest that in the year 1998, almost all the firms had Economics of Density in their existing networks, while several of the firms also had Economies of Scale and Economies of Spatial Scope. All of the firms had excess capacity of fixed inputs. These results support our hypothesis that fusion, alliance, and merger strategies followed by the principal European airlines after 1998 are not just explained by marketing strategies, but also by the cost structure of the industry.
    Date: 2006–08
  15. By: Thomas De Graaff; Jaap Boter; Jan Rouwendal
    Abstract: This paper looks into the effect of distance on market shares of Dutch museums. To this end, we assume a generic distance decay function for all museums. In addition, we allow for spatial dependence between museums to account for local competition or synergy effects. Using a unique transaction database with the visiting behavior of 80,821 museum cardholders to 108 Dutch museums, we are able to calculate market shares of each museum in all 484 Dutch municipalities. To account for possible measurement error in the market shares, we adopt a spatial two error component model. Finally, we allow for additional heterogeneity by segmenting the 108 museums using a mixture approach. Without segmenting, preliminary results indicate positive spatial dependence between museums, which points to the conclusion that -- in general -- museums benefit from each others presence.
    Date: 2006–08
  16. By: Ralph Siebert (Department of Economics, Krannert School of Management, Purdue University, 403 West State Street, West Lafayette, IN 47907-2056, USA.; Georg von Graevenitz (INNO-tec, Munich School of Management, University of Munich, Kaulbachstraße 45, 80539 Munich, Germany.,)
    Abstract: Licensing in a patent thicket allows firms to either avoid or resolve hold-up. Firms’ R&D incentives depend on whether they license ex ante or ex post. We develop a model of a patent portfolio race, which allows for endogenous R&D efforts, to study firms’ choice between ex ante and ex post licensing. The model shows that firms’ relationships in product markets and technology space jointly determine the type of licensing contract chosen. In particular, product market competitors are more likely to avoid patent portfolio races, since the threat of hold-up increases. On the other hand, more valuable technologies are more likely to give rise to patent portfolio races. We also discuss the welfare implications of these results.
    Keywords: hold-up problem, licensing, innovation, patent race, patent thicket, research joint ventures
    JEL: L13 L49 L63
    Date: 2006–09
  17. By: David Margolis (Crest)
    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 displaced worker literature are also those who tend to be overrepresented 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: optimal matching
    Date: 2006–03
  18. By: Bertoletti, Paolo
    Abstract: We re-examine the case for uniform pricing in a monopolistic third-degree price-discrimination setting by introducing differentiated costs. A profit-maximizing monopolist could then use price differentiation to reduce the production of the more costly goods, thereby decreasing average cost and increasing welfare. Indeed, monopolistic price differentiation can improve welfare and also aggregate consumer surplus even if, as in the benchmark linear case, total output does not increase. Accordingly, the welfare criterion based on total output fails and should be replaced by the computation of well-defined price indexes. These results possibly pave the way for a more optimistic assessment of monopolistic pricing.
    Keywords: uniform pricing; third-degree price discrimination; welfare bounds; price and quantity indexes
    JEL: L51 D11 D42
    Date: 2005–09
  19. By: Johannes Fuhr (Workgroup for Infrastructure Policy (WIP), Technische Universität Berlin)
    Abstract: Ten years have passed since the European Commission obliged its member states to open their national handling markets to competition. This paper analyzes whether the policy has allowed airlines to design efficient contractual and organizational solutions with their ramp handling suppliers. Applying transaction cost economics as the lens of analysis, we propose that the award of temporary limited operating licenses to new entrants results in inferior economic performance. The presented econometric results on the duration of 42 ramp handling contracts and a qualitative case study on the award practices at German airports are largely supportive of this proposition.
    Keywords: Transaction cost, contract, deregulation, air transport, ramp handling
    JEL: D23 L93 L42
  20. By: Philipp Scheib (EnBW Trading, Methodology & Models department); Frieder Kalisch (EnBW Trading, Methodology & Models department); Bernhard Graeber (EnBW Trading, Methodology & Models department)
    Abstract: European gas markets are experiencing fundamental change due to decrease in domestic production, increase in demand and liberalisation efforts of the European Union. Germany represents the biggest single market in Continental Europe and is also a major transit country for gas. Gas market liberalisation in Germany, however, has so far shown few effects. In this paper we look at how third party network access in an entry-exit regime with different balancing zones (“market areas”) will influence the market. We have developed a multi-regional, inter-temporal model for Germany including transit flows to and from neighbouring countries with monthly resolution. The model is based on the following assumptions: Long term import contracts will stay in effect, network access is regulated based on an entry-exit-system, domestic production will continue to decline, no new infrastructure projects that are not known today can become operational before 2009 and access to storage is not regulated. The model focuses on the transmission system, looking at transit flows between entry-exit-zones. The model proves to be a valuable tool for analysing different set-ups of market areas. Preliminary model results did not confirm the need for 19 market areas in Germany. Data availability still needs to be improved, in order to allow a more detailed analysis and produce tangible and robust results.
    Keywords: natural gas, trading, regulation, network industry, linear optimisation
    JEL: L95 L14 Q41 C61
  21. By: Kingsley E. Haynes; Lei Ding
    Abstract: Since the entry of Chinese domestic mobile handset manufacturers in 1998, Chinese domestic suppliers have successfully surpassed the market share of joint ventures (JVs) while direct imports have been largely phased out. By examining China’s mobile handset manufacturing sector as a whole and through case studies, we found several factors that contributed to the success of China’s domestic handset manufacturers which can be classified into three categories: market conditions, competition, and government’s support.
    Date: 2006–08
  22. By: Miguel Amaral (ATOM – U. of Paris I Sorbonne); Stéphane Saussier (ADIS – U. of Paris 11 & ATOM – U. of Paris I Sorbonne); Anne Yvrande-Billon (ATOM – U. of Paris I Sorbonne)
    Abstract: In this paper we investigate the relationship between auctions’ results and the number of bidders for local transportation contracts in London. Using an original database concerning 294 local transportation routes we find that a higher number of bidders is associated with a lower cost of service. This finding, in addition of being one of the first empirical test of a crucial and understudied theoretical issue has important policy implications, especially for countries in which bids are organized such that only few bidders are allowed to answer (e.g. France).
    Keywords: public services, transportation, franchise bidding, public-private partnerships, winner’s curse, auctions
    JEL: H0 H7 K00 L33
    Date: 2006–09–13

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