nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒02‒10
eighteen papers chosen by
Russell Pittman
US Department of Justice

  1. Competitive in successive markets : entry and mergers By Jean J. GABSWEWICZ, Skerkilajda ZANAJ; Skerdilajda, ZANAJ
  2. Antitrust By Louis Kaplow; Carl Shapiro
  3. Dominant Firms, Imitation, and Incentives to Innovate By Luis Cabral; Ben Polak
  4. The role of technology in M&As: a firm-level comparison of cross-border and domestic deals By Frey, Rainer; Hussinger, Katrin
  5. The Spatial Dynamic Between Established Firms and Entrants By Lawrence A. Plummer
  6. Market Definition and Market Power in Payment Card Networks: Some Comments and Considerations By Lawrence White
  7. Did the Canadian Newspaper Acquisitions Raise Prices for Consumers? By Ambarish Chandra; Allan Collard-Wexler
  8. Power By Samuel Bowles; Herbert Gintis
  9. Personal bankruptcy and credit market competition By Astrid Dick; Andreas Lehnert
  10. Products Liability, Signaling and Disclosure By Andrew F. Daughety; Jennifer F. Reinganum
  11. What determines entrepreneurial clusters? By Luigi Guiso; Fabiano Schivardi
  12. Lignite price negotiation between opencast mine and power plant as a two-stage, two-person, cooperative, non-zero sum game By Jurdziak, Leszek
  13. Learning across policy regimes: The impact of protection vis-à-vis competition in the Indian automotive industry By Saripalle, Madhuri
  14. Industry Restructuring, Mark-ups, and Exchange Rate Pass-Through By Beverly Lapham; Danny Leung
  15. Economics of the Internet By Nicholas Economides
  16. Supplier relations in the Indian automotive industry: arms length to long-term commitment By Saripalle, Madhuri
  17. Optimal copyright length and ex post investment: a Mickey Mouse approach By Adilov, Nodir; Waldman, Michael
  18. Vertical sub-contracting relationships strategy, the Airbus First-tier suppliers\' coordination By Frédéric MAZAUD (LEREPS-GRES); Marie LAGASSE (AIRBUS-FRANCE)

  1. By: Jean J. GABSWEWICZ, Skerkilajda ZANAJ (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Skerdilajda, ZANAJ
    Abstract: This paper analyses successive markets where the intra-market linkage depends on the technology used to produce the final output. We investigate entry of new firms, when entry obtains by expanding the economy as well as collusive agreements between firms. We highlight the differentiated effects of entry corresponding to a constant or decreasing returns, free entry in both markets does not entail the usual tendency for the input price to adjust to its marginal cost while it does under constant returns. Then, we analyse collusive agreements by stressing the role of upstream linkage on the profitability of horizontal mergers ˆ la Salant, Switzer and Reynolds
    Keywords: Oligopoly, entry, horizontal collusion, foreclosure
    JEL: D43 L1 L22 L42
    Date: 2006–10–17
  2. By: Louis Kaplow; Carl Shapiro
    Abstract: This is a survey of the economic principles that underlie antitrust law and how those principles relate to competition policy. We address four core subject areas: market power, collusion, mergers between competitors, and monopolization. In each area, we select the most relevant portions of current economic knowledge and use that knowledge to critically assess central features of antitrust policy. Our objective is to foster the improvement of legal regimes and also to identify topics where further analytical and empirical exploration would be useful.
    JEL: K21 L12 L13 L40 L41 L42
    Date: 2007–01
  3. By: Luis Cabral; Ben Polak
    Date: 2007
  4. By: Frey, Rainer; Hussinger, Katrin
    Abstract: Technological change is often hypothesized as one of the main drivers of merger activities. This paper analyzes the role of technology in mergers and acquisitions (M&As) at the firm level. Based on a newly created data set that combines financial information and patent data for public limited companies in Europe as well as country level variables, we apply a structural model to investigate technology-related motivations behind merger formation. Distinguishing between cross-border and domestic M&As, we find that technological relatedness of the M&A partners reduces uncertainty and the expected risk of failure associated with cross-border acquisitions significantly, whereas there is no evidence for technological complementarities driving domestic M&As. The relevance of technology for crossborder M&As further illustrates the international character of technology markets.
    Keywords: domestic versus cross-border M&As, technological relatedness, market relatedness
    JEL: C25 G34 O32 O34
    Date: 2006
  5. By: Lawrence A. Plummer
    Abstract: The research uses 377 firms that filed initial public offerings from 1990 to 1993 as the basis for existing firms and follows their financial performance from 1990 to 2004. In the first year of a new firm’s existence, before the entrant has time to contribute to positive local effects, its entry is more likely to hurt the financial performance of existing firms. By the third year after entry, however, the effect on the financial performance of existing firms is positive. In the short term, entrants are foes and in the long term, entrants are friends.
    Date: 2007
  6. By: Lawrence White
    Date: 2006
  7. By: Ambarish Chandra; Allan Collard-Wexler
    Date: 2007
  8. By: Samuel Bowles (Santa Fe Institute, University of Siena and University of Massachusetts); Herbert Gintis (Santa Fe Institute and Central European University)
    Abstract: We consider the exercise of power in competitive markets for goods, labour and credit. We offer a definition of power and show that if contracts are incomplete it may be exercised either in Pareto-improving ways or to the disadvantage of those without power. Contrasting conceptions of power including bargaining power, market power, and consumer sovereignty are considered. Because the exercise of power may alter prices and other aspects of exchanges, abstracting from power may miss essential aspects of an economy. The political aspect of private exchanges challenges conventional ideas about the appropriate roles of market and political competition in ensuring the efficiency and accountability of economic decisions. JEL Categories:
    Date: 2007–01
  9. By: Astrid Dick; Andreas Lehnert
    Abstract: The effect of credit market competition on borrower default is theoretically ambiguous, because the quantity of credit supplied may rise or fall following an increase in competition. We investigate empirically the relationship between credit market competition, lending to households, and personal bankruptcy rates in the United States. We exploit the exogenous variation in market contestability brought on by banking deregulation at the state level: after deregulation, banks faced the threat of entry into their state markets. We find that deregulation increased competition for borrowers, prompting banks to adopt more sophisticated credit rating technology. In turn, these developments led previously excluded households to enter the credit market. We document that, following deregulation, (1) overall lending increased, (2) loss rates on loans decreased, and (3) bankruptcy rates rose. Further, we find that lending and bankruptcy rates increased more in states with greater actual (rather than potential) entry, and that credit card productivity increased after the removal of entry restrictions. These findings suggest that entrants brought with them enhanced underwriting technology that allowed for credit extension to new borrowers.
    Keywords: Bankruptcy ; Consumer credit ; Loans, Personal ; Bank competition
    Date: 2007
  10. By: Andrew F. Daughety (Department of Economics and Law School, Vanderbilt University); Jennifer F. Reinganum (Department of Economics and Law School, Vanderbilt University)
    Abstract: In this paper we examine the behavior of a firm that produces a product with a privately-observed safety attribute; that is, consumers cannot observe directly the product¹s safety. The firm may, at a cost, disclose its safety prior to sale; alternatively, if a firm does not disclose its safety then consumers can attempt to infer its safety from the price charged. The liability system is important because it is a determinant of the firm¹s full marginal cost, which consists of both manufacturing cost and liability cost. If the firm does not bear substantial liability for a consumer¹s harm, then the firm¹s marginal cost consists mainly of manufacturing cost, which is presumably higher for safer products. On the other hand, if the firm does bear substantial liability for a consumer¹s harm, then the firm¹s marginal cost consists of both manufacturing cost and liability cost. In this case, it is quite possible for a firm producing a safer product to have lower full marginal cost. We characterize the firm¹s equilibrium disclosure and pricing behavior, and compare that behavior and the associated welfare to what would occur under a regime of mandatory disclosure. We derive a range of disclosure costs that would induce a high-safety firm to choose disclosure over signaling. When the firm¹s full marginal cost is increasing (decreasing) in safety, a firm with a high-safety product will sometimes inefficiently choose to signal rather than disclose (disclose rather than to signal). Furthermore, we find that whether ex ante information regulation (in the form of mandatory disclosure) or reliance on ex post liability that induces information revelation is the better policy also depends upon whether the firm faces substantial liability for a consumer¹s harm. Finally, we find that a small fraction of naively optimistic consumers (who always buy as if the product were of high safety) leads to higher profits for both less-safe and safer products, and a reduced incentive for voluntary disclosure.
    Keywords: Products liability, disclosure, signaling, safety, quality
    JEL: K13 L15 D82
    Date: 2006–12
  11. By: Luigi Guiso; Fabiano Schivardi
    Abstract: We contrast two potential explanations of the substantial differences in entrepreneurial activity observed across geographical areas: entry costs and external effects. We extend the Lucas model of entrepreneurship to allow for heterogeneous entry costs and for externalities that shift the distribution of entrepreneurial talents. We show that these assumptions have opposite predictions on the relation between entrepreneurial activity and firm level TFP: with different entry costs, in areas with more entrepreneurs firms’ average productivity should be lower and vice versa. We test these implications on a sample of Italian firms and unambiguously reject the entry costs explanation in favor of the externalities one. We also investigate the sources of external effects, finding robust evidence that learning externalities are an important determinant of cross-sectional differences in entrepreneurial activity
    Keywords: Entrepreneurship, clustering, agglomeration economies
    JEL: D24 D62 J23
    Date: 2006
  12. By: Jurdziak, Leszek
    Abstract: Based on the simple model of the deposit the methodology of finding the optimal solution for bilateral monopoly (BM) of lignite mine and power plant is shown taking into account pit optimisation. It is proposed to treat lignite price negotiation as a kind of game. In the first stage (cooperative) both sides should select the ultimate pit maximising joint profits of BM and in the second one (competitive) the agreement should be achieved regarding profit division. This can be realised through side payments or by establishing the lignite transfer price. Lack of cooperation and opportunism can lead to the suboptimal solution – excavation of the smaller pit. Due to information asymmetry realisation of the optimal solution is more probably in vertically integrated firms. Dynamic adjustments of LOM BM plan to short-term changes of energy market using optimisation, BM model, game theory and their valuation as real options is the new direction of further re-search.
    Keywords: bilateral monopoly; co-operative game; price negotiation; non-zero sum game; Pareto optimal solution; lignite price; power plant; lignite mine; pit optimisation; optimal ultimate pit; pit phases;
    JEL: L22 D82 D43 D86 C78 D24 L13 D74 L11 L14 Q31 L72 C71 L94
    Date: 2006–09–24
  13. By: Saripalle, Madhuri
    Abstract: Learning has been recognized as an important factor in explaining the growth of firms in both industrial organization theory and literature. However, few models have attempted to relate the learning and growth literature with the industrial policy regime, especially in economies heavily regulated by government policies. The present study attempts to apply one such model of growth and learning of firms across three different industrial policy regimes in the Indian automotive industry. It tries to analyze whether learning is promoted by a competitive or a protective policy regime. It also tries to decompose learning into several types to understand the mechanism underlying the growth process. In doing so, it relies on the growth-size distribution literature.
    Keywords: Learning; growth; policy regime; automobile Industry; India; Asia.
    JEL: L5 C33 L62
    Date: 2006
  14. By: Beverly Lapham (Queen's University); Danny Leung (Bank of Canada)
    Abstract: Consumer prices are not very responsive to movements in nominal exchange rates and their response has fallen in Canada since the mid 1980s. This paper explores two of the most likely explanations for this decline in exchange rate pass-through to consumer prices: (1) lower inflation and (2) restructuring in the retail sector. We believe that both explanations are important but our primary focus in this paper is on the second explanation. We discuss the restructuring that has occurred in Canadian retail and trends in mark-ups and concentration in that sector. We argue that to understand these trends, it is important to examine pass-through in industrial organization models with strategic elements. Finally, we present a series of such models and evaluate the effects of various forms of restructuring on mark-ups, concentration, and exchange rate pass-through.
    Keywords: Pass-Through, Restructuring, Strategic Pricing, Mark-ups, Exchange Rates, Imperfect Competition
    JEL: D40 F15 F31 F41 L16
    Date: 2006–10
  15. By: Nicholas Economides
    Date: 2007
  16. By: Saripalle, Madhuri
    Abstract: This paper compares the supplier relations of domestic and Multinational automobile manufacturers in India. The study finds a range of governance forms from market linkage to relational value chains present in the industry, a feature which can be explained in terms of the sourcing strategies of the auto manufacturers. The paper argues that the incentives for long-term supplier development depend on the trade-off faced by the assemblers in terms of costs of sourcing from the global “supplier capabilities-pool” versus dynamic transaction costs of developing local capabilities in the absence of high volumes.. The paper also analyzes the reasons behind the uneven diffusion of skills in the tier-II and tier-III suppliers.
    Keywords: Supplier relationship; Transaction costs; capabilities; automobile industry; Asia; India.
    JEL: L22 L62
    Date: 2006–01
  17. By: Adilov, Nodir; Waldman, Michael
    Abstract: This paper formally explores the optimal length of copyright protection when the value of an intellectual work changes over time due to depreciation and value-enhancing ex-post investments. The first main finding is that, in the case of a single project, granting infinitely-lived copyright protection maximizes social welfare when the return on ex-post investments is high relative to the return on the initial investment. We also provide simulation results of our model for the case of multiple heterogeneous projects that show how social welfare varies with the length of copyright protection and the returns on initial and ex-post investments. We then consider what our framework says concerning the social-welfare effects of the 1998 Copyright Term Extension Act. Here we show that, depending on the importance of ex-post investments, the act may have either increased or decreased social welfare. Our final analysis considers the social-welfare implications of replacing fixed-length copyright protection with Landes and Posner's (2003) idea of indefinitely-renewable copyright protection. We find that implementing indefinitely-renewable copyright protection frequently increases social welfare provided the returns on ex-post investments are sufficiently large. We also provide a brief history of Disney's Mickey Mouse and argue that the history of that character matches quite well with the predictions of our theoretical approach.
    Keywords: Optimal copyright length; copyright term extension act
    JEL: L5
    Date: 2006–08
    Abstract: This paper analyzes the transformations of industrial vertical relationships, and more particularly the duality of the coordination modes within new industrial architectures. The paper aims to characterize relationship between the architect and the first-tier suppliers according to the strategic degree of their competence. Two models of coordination arm\'s length and systems integration coexist within the same industrial architecture. The recourse to one or the other varies according to the policy of purchase and the strategic degree of the sub-contracted subsystems. Thus we will analyze the system of subcontracting of Airbus by focusing to the importance of the purchasing policy. The argumentation articulates in two parts. The first one considers the vertical subcontracting relationships in the framework of complex productions, by insisting on organizational aspects. The second one analyses the transformation of the \"Airbus\" productive system by focusing on purchasing process and the emergence of new First-tier supplier’s coordination modes.
    Keywords: NAModularity – Systems Integration – Strategic competences – Purchasing Strategy – First Tier Suppliers – Airbus
    JEL: L2 L23 L62
    Date: 2007

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