nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒01‒28
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Do Auctions select Efficient Firms? By Maarten C.W. Janssen; Vladimir A. Karamychev
  2. Last-In First-Out Oligopoly Dynamics By Jaap H. Abbring; Jeffrey R. Campbell
  3. Merger Clusters during Economic Booms By Albert Banal-Estañol; Paul Heidhues; Rainer Nitsche; Jo Seldeslacht
  4. Endogenous Strategic Managerial Incentive Contracts By Constantine Manasakis; Evangelos Mitrokostas; Emmanuel Petrakis
  5. Corporate Social Responsibility in Oligopolistic Markets By Constantine Manasakis; Evangelos Mitrokostas; Emmanuel Petrakis
  6. Bank Mergers and Diversification: Implications for Competition Policy By Albert Banal-Estañol; Marco Ottaviani
  7. State Aid to Attract FDI and the European Competition Policy: Should Variable Cost Aid Be Banned? By Mario Mariniello
  8. Competition and Inter-Firm Credit: Theory and Evidence from Firm-level Data in Indonesia By Hyndman, Kyle; Serio, Giovanni
  9. Firm Heterogeneity and the Two Sources of Gains from Trade By Itai Agur
  10. Pricing Patents for Licensing in Standard Setting Organisations: Making Sense of FRAND Commitments By Layne-Farrar, Anna; Padilla, Atilano Jorge; Schmalensee, Richard
  11. Investor Protection and Entry By Enrico Perotti; Paolo Volpin
  12. Economics and Politics of Alternative Institutional Reforms By Francesco Caselli; Nicola Gennaioli
  13. Entry Liberalization, Export Subsidy and R&D By Roy Chowdhury, Prabal
  14. Union structure and firms incentives for cooperative R&D investments By Constantine Manasakis; Emmanuel Petrakis
  15. Firm Size and Pricing Policy By Roy Chowdhury, Prabal
  16. Spatial Concentration of Creative Industries in Los Angeles By Sascha Brinkhoff
  17. Value chain analysis and market power in the commodity processing with application to the cocoa and coffee sectors By Christopher L. Gilbert

  1. By: Maarten C.W. Janssen (Erasmus Universiteit Rotterdam); Vladimir A. Karamychev (Erasmus Universiteit Rotterdam)
    Keywords: Auctions; cost-efficiency; aftermarkets
    JEL: D43 L11 L13
    Date: 2007–01–04
  2. By: Jaap H. Abbring (Vrije Universiteit Amsterdam); Jeffrey R. Campbell (Federal Reserve Bank of Chicago, and NBER)
    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.
    Keywords: Sunk costs; Demand uncertainty; Markov-Perfect equilibrium; LIFO
    JEL: L13
    Date: 2006–12–19
  3. By: Albert Banal-Estañol (Department of Economics, City University, London); Paul Heidhues; Rainer Nitsche; Jo Seldeslacht
    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.
    Keywords: Mergers, Merger Waves, Screening
    JEL: D21 D80 L11
    Date: 2006–09
  4. By: Constantine Manasakis (Department of Economics, University of Crete, Greece); Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: This paper studies the endogenous structure of incentive contracts that firms' owners offer to their managers, when these contracts are linear combinations either of own profits and own revenues, or of own profits and competitor's profits or, finally, of own profits and own market share. In equilibrium, each owner has a dominant strategy to reward his manager with a contract combining own profits and competitor's profits. Contrary to the received literature, the case where there is no ex-ante commitment over any type of contract that each owner offers to his manager is also examined. In equilibrium, each type of contract is an owner's best response to the competing owner's choice.
    Keywords: Oligopoly; Managerial delegation; Endogenous contracts
    JEL: D43 L21
    Date: 2007–01–23
  5. By: Constantine Manasakis (Department of Economics, University of Crete, Greece); Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: This paper studies firms owners' incentives to engage in Corporate Social Responsibility (CSR) activities in an oligopolistic market, in a strategic delegation and vertical product differentiation context. Firms' owners have the opportunity to hire "socially responsible" managers and delegate to them CSR effort and market competition decisions. In equilibrium, both owners employ socially responsible managers. The strategic behavior of owners to hire socially responsible managers increases both output and profits. The societal consequences of Corporate Social Responsibility are also discussed.
    Keywords: Oligopoly; Vertical Product Differentiation; Corporate Social Responsibility; Strategic Managerial D
    JEL: L15 L22 M14
    Date: 2006–06–10
  6. By: Albert Banal-Estañol (Department of Economics, City University, London); Marco Ottaviani
    Abstract: This paper analyses competition and mergers among risk averse banks. We show that the correlation between the shocks to the demand for loans and the shocks to the supply of deposits induces a strategic interdependence between the two sides of the market. We characterize the role of diversification as a motive for bank mergers and analyse the consequences of mergers on loan and deposit rates. When the value of diversification is sufficiently strong, bank mergers generate an increase in the welfare of borrowers and depositors. If depositors have more correlated shocks than borrowers, bank mergers are relatively worse for depositors than for borrowers.
    Keywords: risk aversion; imperfect competition; bank mergers; welfare of depositors and borrowers
    JEL: D43 G21 G32 G34
    Date: 2006–12
  7. By: Mario Mariniello
    Abstract: The purpose of this paper is to analyze the European Commission's approach to state aid for foreign direct investment in a competition policy framework. The Commission shows to consider variable cost aid (VCA) to be more distortive than start-up or fixed cost aid (FCA). This paper addresses that issue and checks whether allowing FCA while banning VCA is a first-best strategy for a rational Authority maximizing welfare. The model shows that a rational forward-looking government maximizing domestic welfare always prefers VCA to FCA if both the incumbent and the entrant are foreign firms and if granting VCA does not cause to the incumbent firm to exit the market. On the other hand, a VCA which causes the incumbent firm to be crowded out by the entrant never occurs at the equilibrium. The model shows that the Commission's approach may lead to sub-optimal equilibria where market competition and consumers.welfare are not maximized.
    Keywords: state aid, competition policy, start-up aid, variable cost aid
    JEL: L11 L13 L40 L53
    Date: 2006
  8. By: Hyndman, Kyle (SMU); Serio, Giovanni (Goldman Sachs)
    Abstract: Using firm-level data we investigate the relationship between trade credit and suppliers’ market structure and find an inverted U-shaped relationship between competition and trade credit, with a discontinuous increase in credit provision between monopoly and duopoly. This “big jump” arises because monopolists are more likely to not offer any trade credit than firms in competitive environments. Our model exploits the fundamentally different nature between cash and trade credit sales, arguing that firms are unable to commit ex ante to a trade credit price. We show that monopolists will often sell only on cash, while credit is always provided in competitive environments.
    Keywords: Trade Credit, Competition, Development, Industrial Organization.
    JEL: L1 O16
    Date: 2007–01
  9. By: Itai Agur
    Abstract: Recent empirical work two main channels through which consumers benefit from trade. Trade liberalization lowers prices, while it raises product variety. This paper develops the first model that connects both channels and interprets their interaction. It shows that heterogeneity in firm productivity is the source behind both. Upon liberalization efficient exporters enter, pushing out the least efficient domestic firms. Two countervailing forces emerge, both stylized facts. Liberalization leaves a moreconcentrated market. But exporters o¤er more variety than the .rms that they replace. Remarkably, total variety unambiguously increases. Exploration of comparative statics leads to an intuitive explanation.
    Keywords: Trade, Firm selection, Product Variety, Heterogeneous firms
    JEL: F12 F15 L11
    Date: 2006
  10. By: Layne-Farrar, Anna; Padilla, Atilano Jorge; Schmalensee, Richard
    Abstract: We explore potential methods for assessing whether licensing terms for intellectual property declared essential within a standard setting organization can be considered fair, reasonable, and non-discriminatory (FRAND). We first consider extending Georgia-Pacific to a standard setting context. We then evaluate numeric proportionality, which is modelled after certain patent pool arrangements and which has been proposed in a pending FRAND antitrust suit. We then turn to two economic models with potential. The first—the efficient component-pricing rule (ECPR)—is based on the economic concept of market competition. The second—the Shapley value method—is based on cooperative game theory models and social concepts for a fair division of rents. Interestingly, these two distinct methods suggest a similar benchmark for evaluating FRAND licenses, but ones which might appeal differently to the courts and competition authorities in the US as compared to Europe. We find that under any approach, patents covering “essential” technologies with a greater contribution to the value of the standard and without close substitutes before the standard gets adopted should receive higher royalty payments after the adoption of the standard.
    Keywords: Efficiency; Fairness; Licensing; Patents; Standard Setting Organizations
    JEL: L24 L40
    Date: 2007–01
  11. By: Enrico Perotti (Universiteit van Amsterdam); Paolo Volpin (London Business School)
    Abstract: Entry requires external finance, especially for less wealthy entrepreneurs, so poor investor protection limits competition. We model how incumbents lobby harder to block access to finance to entrants when politicians are less accountable to voters. In a broad cross-section of countries and industries, we find that (i) entry rates and the total number of producers are positively correlated with investor protection in financially dependent sectors and (ii) countries with more accountable political institutions have better investor protection and lower entry costs. We also find that investor protection is more critical to entry than financial market development. We measure political accountability as access to information. Newspaper readership has much more explanatory power than formal measures of democracies. The effect of diffusion of the press is not due to differences in education or in state ownership of the press. Thus newspaper readership appears to proxy for the degree of informed private scrutiny on political decisions.
    Keywords: Financial Development; Investor protection; Entry; Cost of Entry; Political Economy
    JEL: G21 G28 G32
    Date: 2007–01–12
  12. By: Francesco Caselli; Nicola Gennaioli
    Abstract: We compare the economic consequences and political feasibility of reforms aimed at reducing barriers to entry (deregulation) and improving contractual enforcement (legal reform). Deregulation fosters entry, thereby increasing the number of firms (entrepreneurship) and the average quality of management (meritocracy). Legal reform also reduces financial constraints on entry, but in addition it facilitates transfers of control of incumbent firms, from untalented to talented managers. Since when incumbent firms are better run entry by new firms is less profitable, in general equilibrium legal reform may improve meritocracy at the expense of entrepreneurship. As a result, legal reform encounters less political opposition than deregulation, as it preserves incumbents' rents, while at the same time allowing the less efficient among them to transfer control and capture (part of) the resulting efficiency gains. Using this insight, we show that there may be dynamic complementarities in the reform path, whereby reformers can skillfully use legal reform in the short run to create a constituency supporting future deregulations. Generally speaking, our model suggests that "Coasian" reforms improving the scope of private contracting are likely to mobilize greater political support because -- rather than undermining the rents of incumbents -- they allow for an endogenous compensation of losers. Some preliminary empirical evidence supports the view that the market for control of incumbent firms plays an important role in an industry's response to legal reform.
    JEL: G34 O11 O16
    Date: 2007–01
  13. By: Roy Chowdhury, Prabal
    Abstract: We examine, in the context of less developed countries, the R&D behaviour of igopolistic firms who compete over R&D, as well as output levels. We also assume that the firms can sell in either of the two markets - the domestic, or the foreign. We show that entry liberalization, despite increasing the level of competitiveness, does not affect the level of R&D. An increase in export subsidy may, however, lead to an increase in domestic R&D. Both these results contradict the popular argument that the levels of domestic R&D is positively related to the level of domestic competitiveness. We also demonstrate that any foreign firm that may enter selects a level of R&D that is atleast as efficient as that selected by any domestic firm. Finally, we demonstrate that entry liberalization has a positive effect on exports, as well as aggregate output.
    Keywords: Entry liberalization; export subsidy; R&D; competitiveness.
    JEL: F13 O32
    Date: 2006–02
  14. By: Constantine Manasakis (Department of Economics, University of Crete, Greece); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: This paper investigates the impact of alternative unionization structures on firms' incentives to spend on cost-reducing R&D activities as well as to form a Research Joint Venture, in the presence of R&D spillovers. We show that, in contrast to the "hold up" argument, if firms invest non-cooperatively and spillovers are low, R&D investments are higher when an industry-wide union sets a uniform wage rate than under firm-level unions. In contrast, investments are always higher under firm-level unions in the case of RJVs. Firms' incentives to form an RJV are non-monotonic in the degree of centralization of the wage-setting, with the incentives being stronger under an industry-wide union if and only if spillovers are low enough. Finally, centralized wage-setting as well as high unemployment benefits may hinder the formation of costly RJVs and their potential welfare benefits.
    Keywords: Unions, Oligopoly, Cost-reducing Innovations, Research Joint Ventures, Spillovers
    JEL: J51 L13 O31
    Date: 2007–01–23
  15. By: Roy Chowdhury, Prabal
    Abstract: We relate the pricing policy of the firms to their size, where firm size is interpreted as the size of the clientele served by the concerned firm. We argue that a firm with a large clientele faces a more severe reputational backlash if it reneges. This allows the firm to effectively commit to its offers, leading to a unique equilibrium without delay, where the firm extracts the whole of the surplus. For smaller firms, however, the reputational effects are much less intense and, consequently, the equilibria involve reneging possibilities. In this case the equilibria are non-unique, and may involve delays as well.
    Keywords: Firm size; reneging; reputation.
    JEL: D40 C78
    Date: 2006–06
  16. By: Sascha Brinkhoff
    Date: 2007–01–22
  17. By: Christopher L. Gilbert
    Abstract: Value chain analysis extends traditional supply chain analysis by locating values to each stage of the chain. This can result in a “cake division” fallacy in which value at one stage is seen as being at the expense of value at another. Over the past three decades, the coffee and cocoa industries have witnessed dramatic falls in the producer (i.e. farmer) share in rental price. Both industries are highly concentrated at the processing stage. Nevertheless, developments in the producer and retail markets are largely unconnected and there is no evidence the falls in the producer share are the result of exercise of monopoly-monopsony power. The explanation of declining producer shares is more straightforward – processing, marketing and distribution costs, incurred in consuming countries have tended to increase over time while production costs at the origin have declined.
    Date: 2006

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