nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒02‒24
thirty-one papers chosen by
Russell Pittman
US Department of Justice

  1. Efficiency Gains and Structural Remedies in Merger Control By Vasconcelos, Helder
  2. Entry Decision and Pricing Policies By Sílvia Jorge; Cesaltina Pires
  3. Anti- versus Pro-Competitive Mergers By Fridolfsson, Sven-Olof
  4. Discriminatory Limit Pricing By Sílvia Jorge; Cesaltina Pires
  5. Globalization and Profitability of Cross-border Mergers & Acquisitions By Norbäck, Pehr-Johan; Persson, Lars
  6. Competition vs. Regulation in Mobile Telecommunications By Stennek, Johan; Tangerås, Thomas P.
  7. Lower bounds of concentration in a small open economy By Ilmakunnas, Pekka
  8. Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices By Ali Hortacsu; Chad Syverson
  9. Pricing and Trust By Huck, Steffen; Ruchala, Gabriele K.; Tyran, Jean-Robert
  10. Antitrust and Regulation By Dennis W. Carlton; Randal C. Picker
  11. Competition and price adjustment in the euro area By Luis J. Álvarez; Ignacio Hernando
  12. Assessing banking competition: an application to the Spanish market for (quality-changing) deposits By Juan Ayuso; Jorge Martínez
  13. Cross-Border Acquisition or Greenfield Entry: Does it Matter for Affiliate R&D? By Bertrand, Olivier; Hakkala, Katariina; Norbäck, Pehr-Johan
  14. To protect in order to serve, adverse effects of leniency programs in view of industry asymmetry By Leliefeld, Daniel; Motchenkova, Evgenia
  15. Hedonic price functions By Lars Nesheim
  16. Microfoundations of Two-sided Markets: The Payment Card Example By James McAndrews; Zhu Wang
  17. Credit in a Tiered Payments System By Alexandra Lai; Nikil Chande; Sean O'Conner
  18. Measuring the Benefits of Mobile Number Portability By Sean Lyons
  19. Economics and Politics of Alternative Institutional Reforms By Caselli, Francesco; Gennaioli, Nicola
  20. Dynamics in the European Petroleum Markets By Szymon Wlazlowski; Monica Giulietti; Jane Binner; Costas Milas
  21. Endogenous Capacities and Price Competition: The Role of Demand Uncertainty By de Frutos, Maria-Angeles; Fabra, Natalia
  22. Royalty Stacking in High Tech Industries: Separating Myth from Reality By Geradin, Damien; Layne-Farrar, Anna; Padilla, Atilano Jorge
  23. Enemy of Labour? Analysing the Employment Effects of Mergers and Acquisitions By Lehto, Eero; Böckerman, Petri
  24. A Dynamic Equilibrium Model of Firm's Life Cycle and Mergers as Efficient Reallocation By Frantzeskakis, Kyriakos; Ueda, Masako
  25. Must-Take Cards and the Tourist Test By Jean-Charles Rochet; Jean Tirole
  26. Concession Bidding Rules and Investment Time Flexibility By Michele Moretto; Cesare Dosi
  27. The Trade Reducing Effects of Market Power in International Shipping By David Hummels; Volodymyr Lugovskyy; Alexandre Skiba
  28. Combination Bidding in Multi-Unit Auctions By Cantillon, Estelle; Pesendorfer, Martin
  29. Financial Constraints and the Costs and Benefits of Vertical Integration By Macchiavello, Rocco
  30. Procurement when Price and Quality Matter By Asker, John; Cantillon, Estelle
  31. Market Power and Wage Inflation. By Daniel Hamermesh

  1. By: Vasconcelos, Helder
    Abstract: This paper studies the role of structural remedies in merger control in a Cournot setting where (endogenous) mergers are motivated by prospective efficiency gains and must be submitted to an Antitrust Authority (AA) which might require partial divestiture for approval. Both positive and negative effects of merger remedies are identified. First, structural remedies create new merger opportunities to firms. Second, when divestitures are required, the AA over-fixes, i.e., goes beyond the recreation of the level of competition that existed prior to the transaction. Finally, by insisting in over-fixing, the AA may discourage firms to look for more efficient mergers, inducing a final outcome where consumers' surplus is lower than if divestitures couldn't be required. Overall, however, structural remedies are shown to be good: consumers' surplus ex-ante is higher with than without remedies.
    Keywords: efficiency gains; endogenous mergers; failing firm defence.; merger remedies
    JEL: D43 L13 L41 L51
    Date: 2007–02
  2. By: Sílvia Jorge (Universidade de Aveiro); Cesaltina Pires (Universidade de Évora)
    Abstract: We extend the analysis of the impact of firms' pricing policies upon entry to a framework where price competition and differentiated products are present. We consider a model where an incumbent serves two distinct and independent geographical markets and an entrant may enter in one of the markets. Entry under discriminatory pricing is more likely than under uniform pricing when entry is profitable under discriminatory pricing but unprofitable under uniform pricing. Our results show entry under discriminatory pricing may be more, less or equally likely than under uniform pricing. We show that the degree of product substitutability affects the impact of pricing policies upon entry decision.
    Keywords: Entry, Product Differentiation, Discriminatory Pricing, Uniform Pricing
    JEL: D40 L11 L13
    Date: 2007–02
  3. By: Fridolfsson, Sven-Olof (Research Institute of Industrial Economics)
    Abstract: In a framework where mergers are mutually excluding, I show that firms pursue anti- rather than (alternative) pro-competitive mergers. Potential outsiders to anti-competitive mergers refrain from pursuing pro-competitive mergers if the positive externalities from anti-competitive mergers are strong enough. Potential outsiders to pro-competitive mergers pursue anti-competitive mergers if the negative externalities from the pro-competitive mergers are strong enough. Potential participants in anti-competitive mergers are cheap targets due to the risk of becoming outsiders to pro-competitive mergers. Firms may even pursue an unprofitable and anti-competitive merger, when alternative mergers are profitable and pro-competitive.
    Keywords: Anti- and Pro-Competitive Mergers; Consumers' Welfare; Coalition Formation; Endogenous Split of Surplus
    JEL: L12 L13 L41
    Date: 2007–02–05
  4. By: Sílvia Jorge (Universidade de Aveiro); Cesaltina Pires (Universidade de Évora)
    Abstract: We consider a two-period framework where a multimarket incumbent firm faces, in one of the markets, a single potential entrant offering a differentiated product. The incumbent has private information about his production cost and may use both pre-entry prices as predatory signals. We find multiple pure strategy perfect bayesian equilibria. Using equilibrium refine- ments, we show that there is always a unique reasonable perfect bayesian equilibrium. Our results show that in some cases this unique equilibrium entails a downward distortion in both low cost incumbent's pre-entry prices. Moreover, we show that this distortion is identical in both markets and increasing with the discount factor, the degree of product substitutability and the efficiency of the entrant.
    Keywords: Entry Deterrence, Product Differentiation, Asymmetric Information, Discriminatory Pricing
    JEL: D40 D82 L11 L12 L13
    Date: 2007–02
  5. By: Norbäck, Pehr-Johan; Persson, Lars
    Abstract: This paper studies how the surplus generated by the globalization process is divided between MNEs and owners of domestic assets. We construct an oligopoly model where the equilibrium acquisition pattern, the acquisition price and firms' greenfield investments are endogenously determined. Acquisition entry is shown to be more likely when the complementarity between domestic and foreign assets is high. However, we show that such acquisitions might have a low profitability, since the bidding competition over the domestic assets is then so fierce that the firms involved would be better off not starting a bidding war. Risks associated with different entry modes are also examined.
    Keywords: FDI; greenfield investments; investment liberalization.; mergers and acquisitions
    JEL: F23 G34 L13
    Date: 2007–02
  6. By: Stennek, Johan; Tangerås, Thomas P.
    Abstract: This paper questions whether competition can replace sector-specific regulation of mobile telecommunications. We show that the monopolistic outcome prevails independently of market concentration when access prices are determined in bilateral negotiations. A light-handed regulatory policy can induce effective competition. Call prices are close to the marginal cost if the networks are sufficiently close substitutes. Neither demand nor cost information is required. A unique and symmetric call price equilibrium exists under symmetric access prices, provided that call demand is sufficiently inelastic. Existence encompasses the case of many networks and high network substitutability.
    Keywords: access price competition; entry; network competition; network substitutability; regulation; two-way access
    JEL: L51 L96
    Date: 2007–02
  7. By: Ilmakunnas, Pekka
    Abstract: We examine how Sutton’s “bounds” approach works in a small country where industries have relatively high export and import intensities. Import competition is used as an indicator for the degree of competition in the low sunk cost industries. The bounds are estimated as stochastic frontiers, where observable industry characteristics, export intensity and entry barriers, are allowed to affect the mean and variance of the deviations from the frontier. In accordance with the theory, high R&D intensity industries have a lower bound for concentration, which is higher than that for low sunk cost intensity industries. For high advertising industries the theory does not hold as well. High import competition leads to a higher bound in the low sunk cost industries.
    Keywords: concentration; sunk costs; R&D; stochastic frontiers
    JEL: L13 L60 L11
    Date: 2006–09
  8. By: Ali Hortacsu; Chad Syverson
    Abstract: This paper empirically investigates the possible market power effects of vertical integration proposed in the theoretical literature on vertical foreclosure. It uses a rich data set of cement and ready-mixed concrete plants that spans several decades to perform a detailed case study. There is little evidence that foreclosure is quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. These patterns are consistent, however, with an alternative efficiency-based mechanism. Namely, higher productivity producers are more likely to vertically integrate and are also larger, more likely to survive, and charge lower prices. We find evidence that integrated producers' productivity advantage is tied to improved logistics coordination afforded by large local concrete operations. Interestingly, this benefit is not due to firms' vertical structures per se: non-vertical firms with large local concrete operations have similarly high productivity levels.
    JEL: D2 D4 L1 L2 L4
    Date: 2007–02
  9. By: Huck, Steffen; Ruchala, Gabriele K.; Tyran, Jean-Robert
    Abstract: We experimentally examine the effects of flexible and fixed prices in markets for experience goods in which demand is driven by trust. With flexible prices, we observe low prices and high quality in competitive (oligopolistic) markets, and high prices coupled with low quality in non-competitive (monopolistic) markets. We then introduce a regulated intermediate price above the oligopoly price and below the monopoly price. The effect in monopolies is more or less in line with standard intuition. As price falls volume increases and so does quality, such that overall efficiency is raised by 50%. However, quite in contrast to standard intuition, we also observe an efficiency rise in response to regulation in oligopolies. Both, transaction volume and traded quality are, in fact, maximal in regulated oligopolies.
    Keywords: experience goods; markets; moral hazard; price competition; reputation; Trust
    JEL: C72 C90 D40 D80 L10
    Date: 2007–02
  10. By: Dennis W. Carlton; Randal C. Picker
    Abstract: Since the passage of the Interstate Commerce Act (1897) and the Sherman Act (1890), regulation and antitrust have operated as competing mechanisms to control competition. Regulation produced cross-subsidies and favors to special interests, but specified prices and rules of mandatory dealing. Antitrust promoted competition without favoring special interests, but couldn't formulate rules for particular industries. The deregulation movement reflected the relative competencies of antitrust and regulation. Antitrust and regulation can also be viewed as complements in which regulation and antitrust assign control of competition to courts and regulatory agencies based on their relative strengths. Antitrust also can act as a constraint on what regulators can do. This paper uses the game-theoretic framework of political bargaining and the historical record of antitrust and regulation to establish and illustrate these points.
    JEL: K2 K21 K23 L4 L43 L44 L5 L51
    Date: 2007–02
  11. By: Luis J. Álvarez (Banco de España); Ignacio Hernando (Banco de España)
    Abstract: This paper explores the role of a number of factors in explaining the heterogeneity in the degree of price stickiness across industries, on the basis of the information provided by surveys on pricing behavior conducted in nine euro area countries. The main focus is placed on the influence of competition on the degree of price flexibility. Our results suggest that the price setting strategies of the most competitive firms give them a greater capacity to react to shocks and make, in practice, for greater flexibility in their prices. The direct influence of market competition on price flexibility is corroborated by a cross-country cross-industry econometric analysis based on the information provided by surveys. This analysis also shows that the cost structure and demand conditions help to explain the degree of price flexibility. Finally, it suggests that countries in which product market regulation is more relevant are characterized by less price flexibility.
    Keywords: price setting, competition, survey data
    JEL: D40 E31
    Date: 2006–10
  12. By: Juan Ayuso (Banco de España); Jorge Martínez (Banco de España)
    Abstract: Taking the Spanish market for deposits as a case study we show the importance of properly controlling for the quality of the services provided when assessing the degree of banking competition. While a simple approach based on estimating the price elasticity of the residual supply of deposit funds faced by banks does not reveal any increase in competition, such an increase is clear when the interest rate on deposits is "corrected" according to the behaviour of variables that proxy the quality of the different services embedded in a bank deposit.
    Keywords: banking competition, panel data, service quality
    JEL: G21 D40
    Date: 2006–09
  13. By: Bertrand, Olivier (GREMAQ); Hakkala, Katariina (Research Institute of Industrial Economics); Norbäck, Pehr-Johan (Research Institute of Industrial Economics)
    Abstract: This paper investigates how the entry mode of foreign direct investment (FDI) affects the affiliate R&D activities using unique data on Swedish multinational firms over a long period of time (1970 to 1998). On average, acquired affiliates are more likely to do R&D and have a higher level of R&D intensity than affiliates created by greenfield entry. This difference in observed R&D is explained by differences in parent, affiliate, industry and country characteristics as well as by different reactions to these characteristics, as predicted by the recent theoretical literature on international mergers and acquisitions (M&As). The results also suggest that M&As are, to a larger extent, motivated by asset-seeking motives than greenfield entry, especially in the 1990s.
    Keywords: FDI; M&A; Greenfield Investment; R&D; Multinational Firm
    JEL: F23 L10 L20 O30
    Date: 2007–01–30
  14. By: Leliefeld, Daniel (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Motchenkova, Evgenia
    Abstract: This paper studies the application of leniency programs. An analysis of the structure and design of leniency programs and existing literature raises a new question: Are leniency programs effective, in the sense that they deter cartels from formation, in asymmetrical markets? A game theoretical model, which allows for asymmetry and predatory pricing, is used to provide an answer. A leniency program does not always lead to a breach of trust. We find that, in certain industries, leniency programs are unable to break collusion. They may have the adverse effect in the sense that they strengthen cartel stability or may even lead to abuse of market power. A relatively large firm can use coercion to remove the option to a smaller firm to self-report to the authorities, thus removing the risk of prosecution posed by the program. In industries characterized by a certain degree of asymmetry in market shares and high sunk costs this is an even more likely scenario. In view of this limitation, a number of policy implications are provided in the paper. Policies aimed at the removal of the threat of retaliation need to be considered in order to convict and deter these kinds of cartels.
    Keywords: Antitrust policy; Antitrust Law; Self-reporting; Leniency programs
    JEL: K21 L41
    Date: 2007
  15. By: Lars Nesheim (Institute for Fiscal Studies)
    Abstract: A hedonic price function describes the equilibrium relationship between characteristics of a product and its price. They are used to predict prices of new goods, to adjust for quality change in price indexes, and to measure consumer and producer valuations of differentiated products. They emerge as market outcomes from both competitive and non-competitive markets. The functional form is determined by the distribution of buyers and their preferences, the distribution of sellers and their costs, and the structure of competition in the market.
    Date: 2006–09
  16. By: James McAndrews; Zhu Wang
    Abstract: This paper provides a theory of two-sided market dynamics with arguably better microfoundations. These alternative microfoundations focus on observable heterogeneities of both sides of the market in a competitive framework. The theory is rich in empirical predictions and is less dependent on a particular form of imperfect competition than other approaches. Our findings in the payment card example point to adoption costs and the distribution of consumer incomes and firm sizes as the key determinants of the shares of costs borne by each side. This result provides clear implications for industry dynamics and sheds light on the puzzle of asymmetric pricing.
    Keywords: Technology Adoption; Two-sided Market; Asymmetric Pricing
    JEL: L10 D40 O30
    Date: 2007–01
  17. By: Alexandra Lai; Nikil Chande; Sean O'Conner
    Abstract: Payments systems are typically characterized by some degree of tiering, with upstream firms (clearing agents) providing settlement accounts to downstream institutions that wish to clear and settle payments indirectly in these systems (indirect clearers). Clearing agents provide their indirect clearers with an essential input (clearing and settlement services), while also competing directly with them in the retail market for payment services. The authors construct a model of a clearing agent with an indirect clearer to examine the clearing agent.s incentives to lever off its upstream position to gain a competitive advantage in the retail payment services market. The model demonstrates that a clearing agent can attain this competitive advantage by raising the indirect clearer.s costs, but that the incentive to raise these costs is mitigated by credit risk to the clearing agent from the provision of uncollateralized overdrafts to its indirect clearer. The results suggest that tiered payments systems, which require clearing agents to provide overdraft facilities to their indirect clearers, may result in a more competitive retail payment services market.
    JEL: L10 D40 O30
    Date: 2007–01
  18. By: Sean Lyons (Department of Economics, Trinity College)
    Abstract: Increasing numbers of countries require mobile telephone networks to offer mobile number portability (MNP). MNP allows customers who wish to switch mobile operator to keep their mobile numbers, avoiding the costs of switching to new numbers. Ex ante assessments suggest that MNP should reduce switching costs and strengthen competition. In this paper, we test MNP’s impact on market outcomes using international time-series cross-section data. We find that MNP significantly increases average mobile telephony retail prices and churn (a proxy for switching).
    JEL: L51 L96
    Date: 2006–05
  19. By: Caselli, Francesco; Gennaioli, Nicola
    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.
    Keywords: deregulation; entry; legal reform
    JEL: G34 O11 O16
    Date: 2007–02
  20. By: Szymon Wlazlowski (Aston Business School, Aston University); Monica Giulietti (Aston Business School, Aston University); Jane Binner (Aston Business School, Aston University); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: This paper analyses horizontal and vertical price dynamics in the EU petroleum markets. The results indicate that the cross-country price differentials have significant impact on the local price adjustments. The uncovered patterns can be seen as the first empirical support for the politically-charged concept of ‘‘fuel tourism’’, obtained using pan-European cross-product time-series database. Even more interestingly, when analysed in cross-country setting, the dreaded welfare transfer due to the asymmetric price transmission phenomenon is found to be less pronounced than claimed before.
    Keywords: Production, Pricing, and Market Structure; Petroleum, General Energy, Energy and Macroeconomy.
    JEL: L11 Q40 Q43
    Date: 2007–02
  21. By: de Frutos, Maria-Angeles; Fabra, Natalia
    Abstract: This paper analyzes a model of capacity choice followed by price competition under demand uncertainty. Under various assumptions regarding the nature and timing of demand realizations, we obtain general predictions concerning the role of demand uncertainty on equilibrium outcomes. We show that it reduces the multiplicity of equilibria, it may rule out the existence of symmetric equilibria, and it leads to endogenous capacity asymmetries even though firms are ex-ante symmetric. Furthermore, as compared to the certainty equivalent game, demand uncertainty reduces prices and increases consumer surplus, but it also decreases total welfare because of the emergence of idle capacity. By relying on the analysis of firms' reaction functions as well as on the theory of submodular games, we are able to show that a subgame perfect equilibrium always exists and to fully characterize it.
    Keywords: demand uncertainty; investment; price competition; submodular game
    JEL: D43 D80 L11
    Date: 2007–02
  22. By: Geradin, Damien; Layne-Farrar, Anna; Padilla, Atilano Jorge
    Abstract: A few recent contributions have claimed that in high-tech industries—where innovation is often cumulative and products include many components which are protected by patents in the hands of many different patent holders—the cost of obtaining all necessary licenses is too high. Some have even requested sweeping policy reforms to deal with the so-called royalty stacking problem. In this Essay we find that the empirical evidence—including new evidence for the 3G telecom industry—does not corroborate the gloomy predictions of the proponents of the royalty stacking hypothesis. A careful look at the theoretical underpinnings of this hypothesis explains the lack of empirical support. First, three necessary conditions must be satisfied for a royalty stacking problem to exist: (a) innovation must be cumulative, so that the patents are complementary; (b) there must be many patents for a given product; and (c) the many patents must be held by numerous, distinct rights holders. Second, royalty stacking may not be a problem even if the three necessary conditions are met; i.e., the three necessary conditions are not sufficient. And, third, several market mechanisms, such as cross licensing or voluntary patent pools, can be used to mitigate the costs of multiple concurrent patent negotiations. We conclude that the so-called royalty stacking problem is more myth than reality and that there is no reason to adopt the dramatic reforms in antitrust and patent law that have been recently proposed by, inter alia, Lemley and Shapiro (2006).
    Keywords: excessive royalties; hold up; innovation; mobile telecommunications; patent licensing
    JEL: L13 L96 O34
    Date: 2007–02
  23. By: Lehto, Eero; Böckerman, Petri
    Abstract: This paper analyses the employment effects of mergers and acquisitions by using matched establishment-level data from Finland over the period of 1989-2003. The data covers all sectors. We compare the employment effects of cross-border M&As with the effects arising from two different types of domestic M&As and internal restructurings. The results reveal that cross-border M&As lead to downsizing in manufacturing employment. The effects of cross-border M&As on employment in non-manufacturing are much weaker. Changes in ownership associated with domestic M&As and internal restructurings also typically cause employment losses, but these is interesting sectoral variation.
    Keywords: Mergers and acquisitions; M&As; takeovers; employment; workforce
    JEL: J60 J63
    Date: 2006–10–15
  24. By: Frantzeskakis, Kyriakos; Ueda, Masako
    Abstract: Any factor that makes acquisition more appealing should increase the number of acquisition that occur. This idea has been captured in standard static models in the literature. However, an increase in the number of acquisitions today means fewer firms exist to perform acquisitions in the future. This dynamic, which we explore, is not well understood. We study a model of mergers motivated by efficient reallocation of projects. A firm may conceive a project that it may not be able to develop successfully. It can be acquired by an established firm that has already proved its ability to develop such projects successfully. We find that, when acquisition costs are low established firms acquire young firms (but not other established firms) in the steady state. More strikingly, if the likelihood of project success decreases for young firms, we find that a higher fraction of young firms attempt to develop their projects rather than to be acquired. This contrasts the previous literature's findings on acquisitions. The explanation for this result is that an increased likelihood of firms' failures causes a shortage of established firms that can then acquire new young firms. Finally, if acquisition costs are moderate we find that established firms acquire other established firms, but not young firms.
    Keywords: firm's life cycle; mergers as reallocation
    JEL: D83 D92 G34
    Date: 2007–02
  25. By: Jean-Charles Rochet; Jean Tirole
    Abstract: Antitrust authorities often argue that merchants cannot reasonably turn down payment cards and therefore are forced to accept unacceptably high merchant discounts. The paper attempts to shed light on this “must-take cards” view from two angles. First, the paper gives some operational content to the notion of “must-take card” through the “tourist test” (would the merchant want to refuse a card payment when a non-repeat customer with enough cash in her pocket is about to pay at the cash register?) and analyzes its relevance as an indicator of excessive interchange fees. Second, it identifies four key sources of potential social biases in the payment card associations' determination of interchange fees: internalization by merchants of a fraction of cardholder surplus, issuers' per-transaction markup, merchant heterogeneity, and extent of cardholder multi-homing. It compares the industry and social optima both in the short term (fixed number of issuers) and the long term (in which issuer offerings and entry respond to profitability).
    Keywords: Card payment systems; interchange fee; internalization; multi-homing; tourist test.
    JEL: L10 D40 O30
    Date: 2007–01
  26. By: Michele Moretto (University of Padova); Cesare Dosi (University of Padova)
    Abstract: We study the competition to operate an infrastructure service by developing a model where firms report a two-dimensional sealed bid: the price to consumers and the concession fee paid to the government. Two alternative bidding rules are considered in this paper. One rule consists of awarding the exclusive right of exercise to the firm that reports the lowest price. The other consists of granting the franchise to the bidder offering the highest fee. We compare the outcome of these rules with reference to two alternative concession arrangements. The former imposes the obligation to immediately undertake the investment required to roll-out the service. The latter allows the winning bidder to optimally decide the investment time. The focus is on the effect of bidding rules and managerial flexibility on expected social welfare. We find that the two bidding rules provide the same outcome only when the contract restricts the autonomy of the franchisee, and we identify the conditions under which time flexibility can provide a higher social value.
    Keywords: Concessions, Auctions, Bidding Rules, Managerial Flexibility
    JEL: L51 D44 D92
    Date: 2007–01
  27. By: David Hummels; Volodymyr Lugovskyy; Alexandre Skiba
    Abstract: Developing countries pay substantially higher transportation costs than developed nations, which leads to less trade and perhaps lower incomes. This paper investigates price discrimination in the shipping industry and the role it plays in determining transportation costs. In the presence of market power, shipping prices depend on the demand characteristics of goods being traded. We show theoretically and estimate empirically that shipping firms charge higher prices when transporting goods with higher product prices, lower import demand elasticities, and higher tariffs, and when facing fewer competitors on a trade route. These characteristics explain more variation in shipping prices than do conventional proxies such as distance, and significantly contribute to the higher shipping prices facing the developing world. Markups increase shipping prices by at least 83 percent for the mean shipment in Latin American imports. Our findings are also important for evaluating the impact of tariff liberalization. Shipping firms decrease prices by 1-2 percent for every 1 percent reduction in tariffs.
    JEL: F15 L91 O19
    Date: 2007–02
  28. By: Cantillon, Estelle; Pesendorfer, Martin
    Abstract: This paper considers the problem of identification and estimation in the first-price multi-unit auction. It is motivated by the auctions of bus routes held in London where bidders submit bids on combinations of routes as well as on individual routes. We show that submitting a combination bid lower than the sum of the bids on the constituent routes does not require cost synergies and can instead serve as a tool to leverage market power across the different routes. As a result, the welfare consequences of allowing combination bidding in the first price auction are ambiguous, and depend on the importance of the cost synergies. We provide conditions for non-parametric identification of the multidimensional private information in the multi-unit first price auction and derive partial identification results when they are not satisfied. We propose an estimation method consisting of two stages: In the first stage, the distribution of bids is estimated parametrically. In the second stage, the (set of) costs and distribution(s) of costs consistent with the observed behavior are inferred based on the first order conditions for optimally chosen bids. We apply the estimation method to data from the London bus routes market. We quantify the magnitude of cost synergies and assess possible efficiency losses arising in this market.
    Keywords: combinatorial auction; empirical; multi-unit auction; procurement
    JEL: D44
    Date: 2007–02
  29. By: Macchiavello, Rocco
    Abstract: Does vertical integration reduce or increase transaction costs with external investors? This paper analyzes an incomplete contracts model of vertical integration in which a seller and a buyer with no cash need to finance investments for production. The firm is modeled as a "nexus of contracts" across the intermediate input supply and the financing transaction. The costs and benefits of vertical integration depend on the relative importance of a positive "contractual centralization" effect against a negative "de-monitoring" effect: the firm centrally organizes the nexus of contracts reducing the extent of contractual externalities while the market disciplines decisions driven by private benefits. Larger projects, more specific assets, and low investors protection are determinants of vertical integration.
    Keywords: contractual externalities; investors protection; limited liability; theory of the firm; vertical integration
    JEL: D23 G32 K12 L22 O10
    Date: 2007–02
  30. By: Asker, John; Cantillon, Estelle
    Abstract: A buyer seeks to procure a good characterized by its price and its quality from suppliers who have private information about their cost structure (fixed cost + marginal cost of providing quality). We solve for the optimal buying procedure, i.e. the procedure that maximizes the buyer's expected utility. We then use the optimal procedure as a theoretical and numerical benchmark to study practical and simple buying procedures such as scoring auctions and negotiation. Specifically, we derive the restrictions that these simpler procedures place on allocations and compare them with the optimal allocations to generate insights about the properties of these simpler procedures and identify environments where they are likely to do well. We also use the optimal procedure benchmark to compare the performance of these procedures numerically. We find that scoring auctions are able to extract a good proportion of the surplus from being a strategic buyer, that is, the difference between the expected revenue from the optimal mechanism and the efficient auction. Sequential procedures (to which many negotiation processes belong) do less well, and, in fact, often worse than simply holding an efficient auction. In each case, we identify the underlying reason for these results.
    Keywords: bargaining; multidimensional signal; optimal auction; procurement; quality; scoring auction
    JEL: C78 D44 D82 L22 L24
    Date: 2007–02
  31. By: Daniel Hamermesh

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