nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒03‒10
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Are Sunk Costs a Barrier to Entry? By Cabral, Luís M B; Ross, Thomas
  2. Strategic Quality Competition and the Porter Hypothesis. By Francisco J. André; Paula González; Nicolás Porteiro
  3. Integration and Separation with Costly Demand Information By Elisabetta Iossa; Francesca Stroffolini
  4. Downstream Competition, Bargaining and Welfare By George Symeonidis
  5. Best-reply matching in Akerlof’s market for lemons. By Gisèle Umbhauer
  7. Strategic Merger Waves: A Theory of Musical Chairs By Toxvaerd, Flavio
  8. The Effect of Competition on Wages and Productivity: Evidence from the UK By George Symeonidis
  9. The Argentine Competition Law and its Enforcement By Germán coloma
  10. A Structural Empirical Analysis of Retail Banking Competition: the Case of Hungary By József Molnár; Márton Nagy; Csilla Horváth
  11. Generic entry into a regulated pharmaceutical market By Iván Moreno Torres; Jaume Puig; Joan-Ramon Borrell-Arqué
  12. Credit market competition, collateral and firms' finance By Gabriel Jiménez; Vicente Salas-Fumás; Jesús Saurina
  13. Entry barriers in Italian retail trade By Fabiano Schivardi; Eliana Viviano
  14. Red Tape and Delayed Entry By Antonio Ciccone; Elias Papaioannou
  15. Persistent Price Dispersion in Online Markets By Michael R. Baye; John Morgan; Patrick Scholten
  16. Environmental Protection, Consumer Awareness, Product Characteristics, and Market Power By Marcel Boyer; Philippe Mahenc; Michel Moreaux
  17. Banking Sector Integration and Competition in CEMAC By Saab, Samer; Vacher, Jerome

  1. By: Cabral, Luís M B; Ross, Thomas
    Abstract: The received wisdom is that sunk costs create a barrier to entry - if entry fails, then the entrant, unable to recover sunk costs, incurs greater losses. In a strategic context where an incumbent may prey on the entrant, sunk entry costs have a countervailing effect: they may effectively commit the entrant to stay in the market. By providing the entrant with commitment power, sunk investments may soften the reactions of incumbents. The net effect may imply that entry is more profitable when sunk costs are greater.
    Keywords: barriers to entry; sunk costs
    JEL: L13
    Date: 2007–03
  2. By: Francisco J. André (Department of Economics, Universidad Pablo de Olavide); Paula González (Department of Economics, Universidad Pablo de Olavide); Nicolás Porteiro (Department of Economics, Universidad Pablo de Olavide)
    Abstract: In this paper we provide a theoretical foundation for the Porter hypothesis in a context of quality competition. We use a duopoly model of vertical product differentiation where firms simultaneously choose the environmental quality of the good they produce (which can be either high or low) and, afterwards, engage in price competition. In this simple setting, we show that a Nash equilibrium of the game with low quality could be Pareto dominated by another strategy profile in which both firms produce the high environmental quality good. We then show how, in this case, the introduction of a penalty to any firm that produces the low environmental quality can result in an increase in both firms' profits. The impact of the policy on consumers depends on the effect of a quality shift on the cost structure of firms.
    Keywords: environmental quality, vertical differentiation, prisoner's dilemma, environmental regulation, Porter hypothesis.
    JEL: L13 L51 Q55 Q58
    Date: 2007–02
  3. By: Elisabetta Iossa; Francesca Stroffolini
    Abstract: We consider an industry characterized by a regulated natural monopoly in the upstream market and Cournot competition with demand uncertainty in the unregulated downstream market. The realization of demand cannot be observed by the regulator, whilst it can be privately observed at some cost by the upstream monopolist. Information acquisition is also unobservable. We study whether it is better to allow the monopolist to operate in the downstream market (integration) or instead to exclude it (separation). We show that asymmetric information on demand favours separation but unobservability of information acquisition favours integration.
    Keywords: Information acquisition, liberalization and separation
    JEL: D82 D83 L5
    Date: 2007–01
  4. By: George Symeonidis
    Abstract: I analyse the effects of downstream competition when there is bargaining between downstream firms and upstream agents (firms or unions). When bargaining is over a uniform input price, a decrease in the intensity of competition (or a merger) between downstream firms may raise consumer surplus and overall welfare. When bargaining is over a two-part tariff, a decrease in the intensity of competition reduces downstream profits and upstream utility and raises consumer surplus and overall welfare. In both cases, standard welfare results of oligopoly theory can be reversed: less competition can be unprofitable for firms and/or beneficial for consumers and society as a whole.
    Date: 2007–03–02
  5. By: Gisèle Umbhauer
    Abstract: The paper studies Akerlof's market for lemons in a new way. We firstly construct mixed Perfect Bayesian Nash equilibria in which all qualities are sold on the market even if the seller's strategy set is reduced to prices. Then we turn to the best-reply matching (BRM) approach developed by Droste, Kosfeld & Voorneveld (2003) for games in normal form. In a BRM equilibrium, the probability assigned by a player to a pure strategy is linked to the number of times this strategy is a best reply to the other players’ played strategies. We extend this logic to signaling games in extensive form and apply the new obtained concept to Akerlof’s model. This new concept leads to a very simple rule of behaviour, which is consistent, different from the Bayesian equilibrium behaviour, different from Akerlof’s result, and can be socially efficient.
    Keywords: best-reply matching, experience goods, signalling game, mixed Perfect Bayesian Equilibrium, extensive form, normal form.
    JEL: C72 D82 L15
    Date: 2007
  6. By: Francisco Martínez-Sánchez (Universidad de Alicante)
    Abstract: We analyze the roles of the government and the incumbent in preventing piracy, and the reasons and incentives why a pirate would want to be a leader in prices. The framework of analysis used is a duopoly model of vertical product differentiation with price competition, where both incumbent and pirate are committed to keep their prices. We find that both government and incumbent have a key role in avoiding the entry of the pirate. We show that the government will not help the incumbent to become a monopolist, even if he installs an antipiracy system, because a monopoly provides the lowest social welfare. However, he will let the pirate enters as a follower or as a leader, or encourage the incumbent to deter the entry of the pirate, which depends on the technology of the government for monitoring piracy. The pirate decides to become a leader to avoid being brought down by the incumbent and the government, although the leader's profit is lower than the follower's profit. Finally, we find that high-income countries with cheaper monitoring technology have lower piracy rates.
    Keywords: Pirate, Incumbent, Government, Price Leadership, Copy, Monitoring Piracy, Income
    JEL: K42 L13 L86
    Date: 2007–03
  7. By: Toxvaerd, Flavio
    Abstract: This paper proposes an explanation of merger waves based on the interaction between competitive pressure and irreversibility of mergers in an uncertain environment. A set of acquirers compete over time for scarce targets. At each point in time, an acquirer can either postpone a takeover attempt, or raid immediately. By postponing the takeover attempt, an acquirer may gain from more favourable future market conditions, but runs the risk of being preempted by rivals. First, a complete information model is considered, and it is shown that the above tradeoff leads to a continuum of subgame perfect equilibria in monotone strategies that are strictly Pareto ranked. All these equilibria share the feature that all acquirers rush simultaneously in merger waves. The model is then extended to a dynamic global game by introducing slightly noisy private information about merger profitability. This game is shown to have a unique Markov perfect Bayesian equilibrium in monotone strategies, and the timing of the merger wave can thus be predicted. Last, the comparative dynamics predictions of the model are related to stylized facts.
    Keywords: dynamic global games; merger waves; preemption; real options games
    JEL: C73 D92 G34 L13
    Date: 2007–03
  8. By: George Symeonidis
    Abstract: This paper examines the impact of competition on wages and productivity using a panel data set of UK manufacturing industries over 1954-1973. The introduction of cartel law in the UK in the late 1950s caused an intensification of price competition in previously cartelized manufacturing industries, but it did not affect those industries which were not cartelized. The econometric results from a comparison of the two groups of industries before and after the introduction of cartel law provide strong evidence of a negative effect of collusion on labour productivity growth. There is no evidence of any effect of collusion on wages. These results are robust to controlling for the potential endogeneity of collusion and are further strengthened by a comparison with US data.
    Date: 2007–03–02
  9. By: Germán coloma
    Abstract: This article analyzes the basic characteristics of the Argentine competition law and the way in which it has been enforced in several important antitrust cases. We begin with a section that introduces the evolution of the law, followed by another section about the basic economic and legal principles underlying that law. The rest of the article describes the enforcement of the law, in a number of cases that involve collusive practices, exclusionary practices, vertical restraints, abuses of dominant position, and mergers.
    Keywords: Competition law, antitrust, Argentina
    JEL: K21 L40
    Date: 2007–02
  10. By: József Molnár (Bank of Finland); Márton Nagy (Magyar Nemzeti Bank); Csilla Horváth (Radboud University Nijmegen, The Netherlands)
    Abstract: In this paper we analyze the degree of competition in the Hungarian household credit and deposit markets. We estimate discrete-choice, multinomial logit deposit service and loan demand functions for each bank and calculate the corresponding price elasticities. Two models of the banking industry are considered: a static, differentiated product Nash-Bertrand oligopoly (as non-collusive benchmark) and a cartel. With estimated marginal costs and observed interest rates we calculate the price-cost margins and compare these to the theoretically implied ones. We find that in our sample period the competition in the Hungarian banking sector is low, i.e. price-cost margins are high.
    Keywords: Demand, discrete choice, product differentiation, banking, market power.
    JEL: G21 L11 L13
    Date: 2007
  11. By: Iván Moreno Torres; Jaume Puig; Joan-Ramon Borrell-Arqué
    Abstract: The aim of this paper is to analyse empirically entry decisions by generic firms into markets with tough regulation. Generic drugs might be a key driver of competition and cost containment in pharmaceutical markets. The dynamics of reforms of patents and pricing across drug markets in Spain are useful to identify the impact of regulations on generic entry. Estimates from a count data model using a panel of 86 active ingredients during the 1999–2005 period show that the drivers of generic entry in markets with price regulations are similar to less regulated markets: generic firms entries are positively affected by the market size and time trend, and negatively affected by the number of incumbent laboratories and the number of substitutes active ingredients. We also find that contrary to what policy makers expected, the system of reference pricing restrains considerably the generic entry. Short run brand name drug price reductions are obtained by governments at the cost of long run benefits from fostering generic entry and post-patent competition into the markets.
    Keywords: Entry; Generic Drugs; Pharmaceutical industry; Reference pricing
    JEL: I11 L11 L65
    Date: 2007–02
  12. By: Gabriel Jiménez (Banco de España); Vicente Salas-Fumás (Banco de España; Universidad de Zaragoza); Jesús Saurina (Banco de España)
    Abstract: This paper investigates the relationship between credit market competition and the availability of bank credit for firms of unobserved credit quality when firms pledge collateral to secure the loans. Loan data from the Spanish Credit Register shows that the average credit quality of borrowers that get loans in a provincial market decreases with market concentration (which is shown to be positively correlated with market power) and with the availability of collateral, although the marginal effect of each variable decreases for higher values of the other. We also find that credit lines' interest rates increase with the availability of collateral, but the increase is lower for banks operating in more concentrated credit markets.Therefore market power in credit markets and collateral appear as substitutes to increase the availability of bank finance under asymmetric information.
    Keywords: collateral, competition, asymmetric information, relationship banking
    JEL: G21
    Date: 2006–06
  13. By: Fabiano Schivardi (Universita' di Cagliari); Eliana Viviano (Banca d’Italia)
    Abstract: The 1998 reform of the Italian retail trade sector delegated to the regional governments the regulation of entry of large retail shops. We use the local variation in regulation to determine the effects of entry barriers on firm performance for a representative sample of medium and large retail outlets. Using a diff-in-diff approach, we find that entry barriers are associated with substantially higher profit margins and substantially lower productivity of incumbent firms. We also find that liberalizing entry has a positive effect on investment in ICT, which the recent literature has shown to be the main driver of the remarkable sectoral productivity growth in the US. Finally, in the most liberal regions yearly inflation in the CPI component “food and beverages” was approximately half a percentage point lower than in the other regions: higher productivity coupled with lower margins resulted in lower consumer prices.
    Keywords: entry barriers, productivity growth, technology adoption, retail trade
    JEL: L5 L11 L81
  14. By: Antonio Ciccone; Elias Papaioannou
    Abstract: Does cutting red tape foster entrepreneurship in industries with the potential to expand? We address this question by combining the time needed to comply with government entry procedures in 45 countries with industry-level data on employment growth and growth in the number of establishments during the 1980s. Our main empirical finding is that countries where it takes less time to register new businesses have seen more entry in industries that experienced expansionary global demand and technology shifts. Our estimates take into account that proxying global industry shifts using data from only one country–or group of countries with similar entry regulations–will in general yield biased results.
    Keywords: Entry regulation, entry, globally expanding industries
    JEL: E6 F43 L5 L60 L16
    Date: 2006–11
  15. By: Michael R. Baye (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); John Morgan (Haas School of Business and Department of Economics, University of California, Berkeley); Patrick Scholten (Bentley College)
    Abstract: Using data from one of the Internet’s leading price comparison sites for consumer electronics products, we present evidence for the persistence of price dispersion for 36 homogeneous products. The markets for these products are “thick” with an average of over 20 firms selling each product. We show that prices do not converge to the “law of one price” even after an 18 month period. This finding is robust to controls for differences in shipping charges and inventories. Further, we show that product life cycle effects lead to changes in the number of competing firms and the range of price dispersion consistent with the theoretical predictions of the Varian (1980) model. The average number of competing firms declines from about 28 to 10 during the final five months of our dataset. Over this same period, the average range in prices decreases from about 75 percent to 30 percent. After accounting for firm heterogeneities in costs, branding, reputation, trust, product availability and shipping costs, 28 percent of the variation in prices charged for homogeneous products remains unexplained. This is also consistent with the Varian model.
    Keywords: Price dispersion, Internet, Law of One Price
    JEL: D4 D8 M3 L13
    Date: 2006
  16. By: Marcel Boyer; Philippe Mahenc; Michel Moreaux
    Abstract: We investigate the behavior of a polluting monopolist whose production causes a global damage affecting consumers and non-consumers alike while consumption causes a specific damage affecting consumers only. The monopolist anticipates strategically how her decisions on product variant, price and pollution affect the purchasing decisions in a Hotelling market. We compare a standard unregulated monopolist and a monopolist subject to environmental regulation. We show that both monopolists choose the same product variant, that the regulated monopolist pollutes less, produces as much or more, and charges a higher price than the unregulated one. Hence, environmental regulation always lead to an increase in price but never to a reduction in production. <P>Nous étudions le comportement d'un monopole dont la production cause un dommage global de pollution pour les consommateurs et les non-consommateurs de son produit et un dommage spécifique additionnel pour les consommateurs. Le monopole anticipe de manière stratégique l'impact des caractéristiques et du prix du produit et celui du niveau de pollution sur les décisions d'achat des consommateurs. Nous comparons le monopole standard non réglementé et le monopole sujet à une réglementation environnementale. Nous montrons que les deux monopoles choisissent la même variété de produit, que le monopole réglementé pollue moins, produit autant sinon plus, et demande un prix plus élevé que le monopole non-réglementé. Ainsi, la réglementation environnementale dans ce contexte entraîne toujours une hausse de prix mais ne mène jamais à une baisse de production.
    Keywords: environmental protection, consumer awareness, product characteristics, market power, protection environnementale, consommateurs verts, caractéristiques des produits, pouvoir de marché
    Date: 2007–03–01
  17. By: Saab, Samer; Vacher, Jerome
    Abstract: This paper considers the extent of retail banking integration in the Communauté Economique et Monétaire d'Afrique Centrale (CEMAC) and the level of bank competition at the regional level. Using a mix of quantitative and qualitative indicators, the paper finds some evidence of price convergence in average interest rate spreads. However, this observed fact is not supported by an increase in cross-border flows in retail loans and deposits, and price convergence may merely reflect excess liquidity in the region. Other data also indicate that bank competition within the CEMAC as a region is limited, complementing the findings on integration. Addressing shortfalls in legal and regulatory frameworks, infrastructure, and markets would facilitate integration.
    Keywords: Central African Economic and Monetary Community; Banks; Competition; Bank soundness; Financial soundness indicators; Monetary unions; Economic cooperation; CEMAC
    JEL: G21 E58
    Date: 2007–01–01

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