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on Industrial Competition |
| By: | Rochet, Jean Charles; Tirole, Jean |
| Abstract: | Payment card associations offer both debit and credit cards and, until recently, engaged in a tie-in on the merchant side through the so-called honour-all-cards (HAC) rule. The HAC rule came under attack on the grounds that the credit and debit card markets are separate markets and that the associations lever their market power in the 'credit card market' to exclude on-line debit cards and thereby monopolize the 'debit card market'. This article analyzes the impact of the HAC rule, using a simple model with two types of transactions (debit and credit) and two platforms. In the benchmark model, in the absence of HAC rule, the interchange fee (IF, the transfer from the merchant’s bank to the cardholder’s bank) on debit is socially too low, and that on credit is either optimal or too high (depending on downstream members’ market power). In either case, the HAC rule not only benefits the multi-card platform but also raises social welfare, due to a rebalancing effect: The HAC rule allows the multi-card platform to better perform the balancing act by raising the IF on debit and lowering it on credit, ultimately raising volume. The paper then investigates a number of extensions of the benchmark model, including varying degrees of substitutability between debit and credit; merchant heterogeneity; and platform differentiation. While the HAC rule may no longer raise social welfare under all values of the parameters, the basic and socially beneficial rebalancing effect unveiled in the benchmark model is robust. |
| Keywords: | payment cards; price rebalancing.; tie-ins; two-sided markets |
| JEL: | L5 L82 L86 L96 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6132&r=com |
| By: | Halbersma, R.S. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Mikkers, M.C.; Motchenkova, E. |
| Abstract: | In 2005, competition was introduced in part of the hospital market in the Netherlands. Using a unique dataset of transaction and list prices between hospitals and insurers in the years 2005 and 2006, we estimate the influence of buyer and seller concentration on the negotiated prices in the first two years after the institutional change. First, we use a traditional Structure-Conduct-Performance model (SCP-model) along the lines of Melnick et al. (1992) to estimate the effects of buyer and seller concentration on price-cost margins. Second, we model the interaction between hospitals and insurers in the context of a generalized bargaining model (Brooks et al., 1997). In the SCP-model, we obtain that the concentration of hospitals (insurers) has a significantly positive (negative) impact on the hospital price-cost margin. In the bargaining model, we also find a significant negative effect of insurer concentration on the bargaining share of hospital, but no significant effect of hospital concentration on the division of the gains from bargaining. In both models we find a significant impact of idiosyncratic effects on the market outcomes, consistent with the fact that the Dutch hospital sector is not yet in a long-run equilibrium. |
| Keywords: | Competition; Market Structure; Hospitals; Insurers; Bargaining |
| JEL: | I11 L1 C7 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:vuarem:2007-4&r=com |
| By: | Rudholm, Niklas (The Swedish Retail Institute (HUI)) |
| Abstract: | The purpose of this paper is to study if the acquisitions of the SEAT and Skoda has lead to increased economic efficiency for Volkswagen AG due to economies of scale. This is achieved by estimation of the VAG cost function, using a translog specification. The results indicate that the merger with SEAT did increase the economies of scale available as production volumes increased due to the merger. No such effects was, however, found for the aquisition of Skoda. |
| Keywords: | Automobile production; economies of scale; technological change |
| JEL: | D21 D24 L25 |
| Date: | 2006–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:huiwps:0004&r=com |
| By: | Daunfeldt, Sven-Olov (The Swedish Retail Institute (HUI)); Orth, Matilda (School of Economics and Commercial law, Gothenburg University); Rudholm, Niklas (The Swedish Retail Institute (HUI)) |
| Abstract: | A real-options approach was used, incorporating uncertainty and irreversibility of investments, to study the number of stores entering the Swedish retail food market during the period 1994-2002. It was found that uncertainty affected the entry-decision. Entry was less frequent in highly concentrated local retail food-markets characterized by a high degree of uncertainty, whereas higher profit opportunities seem to have increased the probability of entry. |
| Keywords: | Real options; uncertainty; retail food; entry; negative binomial regression |
| JEL: | L13 L81 |
| Date: | 2007–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:huiwps:0001&r=com |
| By: | Joskow, Paul L; Tirole, Jean |
| Abstract: | This paper seeks to bridge the gap between economists focused on designing competitive market mechanisms and engineers focused on the physical attributes and engineering requirements they perceive as being needed for operating a reliable electric power system. The paper starts by deriving the (second-best) optimal prices and investment program when there are price-insensitive retail consumers, but when their load serving entities can choose any level of rationing they prefer contingent on real time prices. It then examines the assumptions required for a competitive wholesale and retail market to achieve this optimal price and investment program. The paper analyses the implications of relaxing several of these assumptions. First, it analyzes the interrelationships between regulator-imposed price caps and capacity obligations. It goes on to explore the implications of potential network collapses, the concomitant need for operating reserve requirements and whether market prices will provide incentives for investments consistent with these reserve requirements. |
| Keywords: | electricity; incentives; regulation |
| JEL: | L1 L5 L9 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6121&r=com |
| By: | Ralf Becker; Stan Hurn; Vlad Pavlov |
| Abstract: | During periods of market stress, electricity prices can rise dramatically. Electricity retailers cannot pass these extreme prices on to customers because of retail price regulation. Improved prediction of these price spikes, therefore, is important for risk management. This paper builds a time-varying-probability Markov-switching model of Queensland electricity prices, aimed particularly at forecasting price spikes. Variables capturing demand and weather patterns are used to drive the transition probabilities. Unlike traditional Markov-switching models, that assume normality of the prices in each state, the model presented here uses a generalized beta distribution to allow for the skewness in the distribution of electricity prices during high-price episodes. |
| Keywords: | electricity prices, regime switching, time-varying probabilities, beta |
| JEL: | C22 C53 Q49 |
| Date: | 2007–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:qut:auncer:2007-4&r=com |
| By: | Mark Carlson; Kris James Mitchener |
| Abstract: | Because California was a pioneer in the development of intrastate branching, we use its experience during the 1920s and 1930s to assess the effects of the expansion of large-scale, branch-banking networks on competition and the stability of banking systems. Using a new database of individual bank balance sheets, income statements, and branch establishment, we examine the characteristics that made a bank a more likely target of a takeover by a large branching network, how incumbent unit banks responded to the entry of branch banks, and how branching networks affected the probability of survival of banks during the Great Depression. We find no evidence that branching networks expanded by acquiring "lemons"; rather those displaying characteristics of more profitable institutions were more likely targets for acquisition. We show that incumbent, unit banks responded to increased competition from branch banks by changing their operations in ways consistent with efforts to increase efficiency and profitability. Results from survivorship analysis suggest that unit banks competing with branch bank networks, especially with the Bank of America, were more likely to survive the Great Depression than unit banks that did not face competition from branching networks. Our statistical findings thus support the hypothesis that branch banking produces an externality in that it improves the stability of banking systems by increasing competition and forcing incumbent banks to become more efficient. |
| JEL: | E44 G21 L1 N22 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12938&r=com |
| By: | Greg Caldwell |
| Abstract: | The author develops a dynamic model of banking competition to determine which capital instrument is most effective in disciplining banks' risk choice. Comparisons are conducted between equity, subordinated debentures (SD), and uninsured deposits (UD) as funding sources. The model, adapted from Repullo (2004), analyzes the effectiveness of regulatory capital when banks incorporate charter value and competition for depositors into their risk-taking decision. The paper's main finding is that although all three instruments can induce market discipline on banks, equity weakly dominates SD and UD (with SD weakly dominating UD). |
| Keywords: | Financial institutions |
| JEL: | G21 G28 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-9&r=com |
| By: | Enrique Alberola (Banco de España); Rodrigo César Salvado (Banco Centroamericano de Integración Económica) |
| Abstract: | A remarkable fact of the mushrooming remittances market is the absence of commercial banks as relevant players. Furthermore, remittances have been identified as a potential catalyst for the financial deepening of receiving countries through higher access to banking services by migrants' families. Building upon these features, this paper sets up a two-period financial model of remittances without uncertainty. The formulation acknowledges, on the one hand, the altruism component of remittances sent by migrants to their families and, on the other hand, the dominant position of Money Transfer Operators (MTO's) due to migrants' mistrust to banks, which hinders the access of banks to the market. Altruism compounded with a non-competitive market allows MTO's to set excessively high remittance fees and to attain monopolistic rents. The model shows that banks can challenge this position thanks to their role as providers of remunerated saving and credit, which enables them to overcome the competitive disadvantage derived by migrants' mistrust. Notwithstanding this, the main positive impact of banks' entry is attained through higher competition, not through the provision of financial services. All in all, the entry of banks reduces the fees and increases the level of remittances, allows an optimal consumption smoothing and improves the welfare of migrants and their families, although it also increases the volatility of remittances. |
| Keywords: | banks, financial development, migrations, remittances |
| JEL: | G20 J61 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0621&r=com |
| By: | A. Mantovani; O. Tarola |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:574&r=com |
| By: | Joseph F. Francois (Department of Economics, Johannes Kepler University Linz, Austria); Ian Wooton (University of Strathclyde, Glasgow) |
| Abstract: | We examine an issue at the nexus of domestic competition policy and international trade, the interaction between goods trade and market power in domestic trade and distribution sectors. Theory suggests a set of linkages between service-sector competition and goods trade supported by econometrics involving imports of 22 OECD countries vis-´a-vis 69 exporters. Competition in services affects the volume of goods trade. Additionally, because of interaction between tariffs and competition, the market structure of the domestic service sector becomes increasingly important as tariffs are reduced. Empirically service competition apparently matters most for exporters in smaller, poorer countries. Our results also suggest that while negotiated agreements leading to crossborder services liberalization may boost goods trade as well, they may also lead to a fall in goods trade when such liberalization involves FDI leading to increased service sector concentration. |
| Keywords: | distribution sector competition; market access; services; trade liberalization; GATS |
| JEL: | L16 L8 F12 F13 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2007_06&r=com |
| By: | Ricardo Lagos; Guillaume Rocheteau |
| Abstract: | This paper investigates how market structure affects efficiency and several dimensions of liquidity in an asset market. To this end, we generalize the search-theoretic model of financial intermediation of Darrell Duffie et al. (2005) to allow for entry of dealers and unrestricted asset holdings. |
| Keywords: | Portfolio management |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0701&r=com |