nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒03‒24
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Airline Competition and Network Structure By Ricardo Flores-Fillol
  2. Mobile call termination in the UK By Armstrong, Mark; Wright, Julian
  3. Testing Optimal Punishment Mechanisms under Price Regulation: the Case of the Retail Market for Gasoline By Robert Gagné; Simon van Norden; Bruno Versaevel
  4. On the Economics of Integrated Ticketing. By Jolian McHardy; Michael Reynolds; Stephen Trotter
  5. Outsourcing and Competition Policy By Cosimo Beverelli Kornel Mahlstein
  6. Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies. By Roland Kirstein; Annette Kirstein
  7. Persistence of profits and the systematic search for knowledge - R&D links to firm above-norm profits By Eklund, Johan; Wiberg, Daniel
  9. The Effect of EU Antitrust Investigations and Fines on a Firm’s Valuation By Langus, Gregor; Motta, Massimo
  10. On the existence of Bayesian Cournot equilibrium By Ezra Einy; Ori Haimanko; Diego Moreno; Benyamin Shitovitz
  11. R&D Delegation in a Duopoly with Spillovers By Bruno Versaevel; Désiré Vencatachellum
  12. Patent Pools and the Dynamic Incentives to R&D By Bruno Versaevel; Vianney Dequiedt
  13. Killing the Goose That May Have Laid the Golden Egg? By Dieter Schmidtchen; Christoph Bier
  14. Die Beziehung zwischen dem Wettbewerbsrecht und dem Recht geistigen Eigentums - Konflikt, Harmonie oder Arbeitsteilung? - The Relationship between Antitrust Law and Intellectual Property Law - Conflict, Accommodation or Division of Labour? By Dieter Schmidtchen
  15. Wettbewerbsfreiheit, Per se Verbote und die Rule of Reason - Anmerkungen zum institutionenökonomisch-evolutionären Wettbewerbsleitbild <br> Freedom to compete, per se rules and the rule of reason - Remarks on the institutional-evolutionary concept for competition policy By Dieter Schmidtchen

  1. By: Ricardo Flores-Fillol
    Abstract: This paper characterizes the equilibria in airline networks and their welfare implications in an unregulated environment. Competing airlines may adopt either fully-connected (FC) or hub-and-spoke (HS) network structures; and passengers exhibiting low brand loyalty to their preferred carrier choose an outside option to travel so that markets are partially served by airlines. In this context, carriers adopt hubbing strategies when costs are sufficiently low, and asymmetric equilibria where one carrier chooses a FC strategy and the other chooses a HS strategy may arise. Quite interestingly, flight frequency can become excessive under HS network configurations.
    Keywords: fully-connected networks; hub-and-spoke networks; brand loyalty; fully-served markets; partially-served markets
    JEL: L13 L2 L93
    Date: 2007–03–19
  2. By: Armstrong, Mark; Wright, Julian
    Abstract: We discuss policy towards mobile call termination, illustrated by the 2002 Competition Commission enquiry into the UK mobile market. We present a model of the mobile market which includes both fixed-to-mobile and mobile-to-mobile call termination. In broad terms, the former service is likely to involve monopoly pricing if left unchecked, while the latter service---if the termination charge is jointly chosen by networks---may provide the mobile sector with the means by which to relax competition. Competition is often relaxed by choosing a low mobile-to-mobile termination charge. If feasible, then, unregulated networks often wish to set different termination charges depending on whether traffic originates on the fixed or mobile network. By contrast, social optimality often requires that uniform termination charges be imposed.
    Keywords: Telecommunications; Regulation; Oligopoly; Call termination
    JEL: L96 L51 L41
    Date: 2007–03–21
  3. By: Robert Gagné (HEC Montréal, CRT and CIRANO); Simon van Norden (HEC Montréal, CIRANO and CIREQ); Bruno Versaevel (EM Lyon, GATE CNRS)
    Abstract: We analyse the effects of a price floor on price wars (or deep price cuts) in the retail market for gasoline. Bertrand supergame oligopoly models predict that price wars should last longer in the presence of price floors. In 1996, the introduction of a price floor in the Quebec retail market for gasoline serves as a natural experiment with which to test this prediction. We use a Markov Switching Model with two latent states to simultaneously identify the periods of price-collusion/price-war and estimate the parameters characterizing each state. Results support the prediction that price floors reduce the intensity of price wars but increase their expected duration.
    Keywords: gasoline prices, Markov switching model, oligopoly supergame, price regulation
    JEL: C32 L13 L81
    Date: 2006–10
  4. By: Jolian McHardy (Department of Economics, The University of Sheffield); Michael Reynolds; Stephen Trotter
    Abstract: In this paper we explore alternative pricing and regulatory strategies within a simple transport network with Cournot duopoly and differentiated demands. We show that whilst firms always prefer to offer integrated ticketing, a social planner will not. With integrated ticketing, the firms always prefer complete collusion but there is not a uniform ranking of some of the less collusive regimes. Society generally prefers the less collusive regimes to complete collusion but prefers some collusion to independent pricing.
    Keywords: Integrated ticketing, duopoly, collusion.
    JEL: D43 L13 R48
    Date: 2005–06
  5. By: Cosimo Beverelli Kornel Mahlstein (Graduate Institute of International Studies, Geneva)
    Abstract: We analyze optimal competition policy by a Competition Agency (CA) in a model with two countries, North and South, where a final good is produced by Northern oligopolistic firms using an input that can either be produced within the firm (vertical integration) or outsourced to Southern oligopolistic producers with lower labor costs (outsourcing). In the case where the final good is only consumed in the North and there is free entry in the South, we find that optimal competition policy in the North is the adoption of a tougher stance. However, with a CA in the South, the Southern CA would optimally appropriate outsourcing rents through restrictions on the degree of competition among domestic firms. In this case the optimal response of the Northern CA would be inaction. In the case where the final good is consumed in both countries, we find that optimal competition policy is marginally affected by the share of Southern consumption, leaving relatively important incentives to engage in rent-shifting. However, for a high enough share of Southern consumption, the interaction between the Northern and Southern CA is shown to be of the Prisoner's Dilemma type, whereby the Nash equilibrium is Pareto-suboptimal and mutual cooperation on competition policy is globally desirable.
    Keywords: Competition policy, outsourcing, vertical integration
  6. By: Roland Kirstein (University of Saarland); Annette Kirstein (Universität Karlsruhe)
    Abstract: The need for intra-firm incentive schemes allows remodeling the Cournot duopoly in wages (rather than in output levels). In both versions of the Cournot model, a cartel agreement is unstable. The new formulation, however, allows us to demonstrate that a collective wage agreement on minimum wages can stabilize the cartel solution. Beyond its relevance for strategic management, this result has a policy implication: competition authorities should observe collective wage agreements for their potential collusive effect on product markets. Moreover, the model may provide a new explanation why firms in reality pay lower than efficient variable wages and higher fixed wages than predicted by contract theory.
    Keywords: Principal-agent theory, piece rate, fixed wage, collective wage agreements, Nash bargaining solution.,
    JEL: C72 C78 D43 J33 J50 K31 L41
  7. By: Eklund, Johan (Jönköping International Business School (JIBS) and CESIS); Wiberg, Daniel (Jönköping International Business School (JIBS) and CESIS)
    Abstract: Economic theory tells us that abnormal firm and industry profits will not persist for any significant length of time. Any firm or industry making profits in excess of the normal rate of return will attract entrants and this competitive process will erode profits. However, a substantial amount of research has found evidence of persistent profits above the norm. Barriers to entry and exit, is an often put forward explanation to this anomaly. In the absence of, or with low barriers to entry and exit, this reasoning provides little help in explaining why these above-norm profits arise and persist. In this paper we explore the links between the systematic search for knowledge and the persistence of profits. By investing in research and development firms may succeed in creating products or services that are preferred by the market and/or find a more cost efficient method of production. Corporations that systematically invest in research and development may, by doing this, offset the erosion of profits and thereby have persistently high profits which diverge from the competitive return.We argue that even in the absence of significant barriers to entry and exit profits may persist. This can be accredited to a systematic search for knowledge through research and development.
    Keywords: Persistence of Profits; Profit Dynamics; R&D; Innovation Activity; Knowledge
    JEL: C10 C32 O10 O32
    Date: 2007–03–13
  8. By: Mario Denni
    Abstract: This paper addresses the determinants of diffusion of broadband infrastructure by looking at the U.S. Federal States. It tries to identify in particular to what extent intra- and inter -platform competition contribute to accelerating the speed of diffusion. Panel data analysis results indicate that both types of competition significantly affect the rate of diffusion, although with different effect. Intra-platform competition seems to have a positive impact only initially on the rate of diffusion but then dissipates. For the longer term, inter -platform has a much more important role in driving the rate of diffusion. The study takes account of the impact of other variables measuring competition in the telecommunications sector as well.
    Keywords: Broadband; Technological diffusion; Regulation and competition
    JEL: L1 L86 L96 O3
  9. By: Langus, Gregor; Motta, Massimo
    Abstract: We estimate, using event study techniques, the impact of the main events in an antitrust investigation on a firm’s stock market value. A surprise inspection at the firm’s premises has a strong and statistically significant effect on the firm’s share price, with its cumulative average abnormal return being approximately -2%. Further, we find that a negative Decision by the European Commission results in a cumulative average abnormal return of about -3.3%. Overall, the fine accounts for a relatively small fraction of this loss in value. Finally, if the Court annuls or reduces the fine, this has a positive (+2%) effect on the firm’s valuation.
    Keywords: antitrust; deterrence; event studies; fines
    JEL: K21 K42 L4
    Date: 2007–03
  10. By: Ezra Einy; Ori Haimanko; Diego Moreno; Benyamin Shitovitz
    Abstract: We show that even in very simple oligopolies with differential information a (Bayesian) Cournot equilibrium in pure strategies may not exist, or be unique. However, we find sufficient conditions for existence, and for uniqueness, of Cournot equilibrium in a certain class of industries. More general results arise when negative prices are allowed.
    Date: 2007–03
  11. By: Bruno Versaevel (GATE CNRS); Désiré Vencatachellum (HEC Montréal)
    Abstract: There is evidence that competing firms delegate R&D to the same independent profit-maximizing laboratory. We draw on this stylized fact to construct a model where two firms in the same industry offer transfer payments in exchange of user-specific R&D services from a common laboratory. Inter-firm and within-laboratory externalities affect the intensity of competition among delegating firms on the intermediate market for technology. Whether competition is relatively soft or tight is reflected by each firm's transfer payment offers to the laboratory. This in turn determines the laboratory's capacity to earn profits, R&D outcomes, delegating firms' profits, and social welfare. We compare the delegated R&D game to two other ones where firms (i) cooperatively conduct in-house R&D, and (ii) non-cooperatively choose in-house R&D. The delegated R&D game Pareto dominates the other two games, and the laboratory earns positive profits, only if within-laboratory R&D services are suffciently complementary but inter-firm spillovers are suffciently low. We find no room for policy intervention, because the privately profitable decision to delegate R&D, when the laboratory participates, always benefits consumers.
    Keywords: common agency, externalities, research and development
    JEL: C72 L13 O31
    Date: 2006–10
  12. By: Bruno Versaevel (EM Lyon, GATE CNRS); Vianney Dequiedt (INRA GAEL)
    Abstract: Patent pools are cooperative agreements between several patent owners to bundle the sale of their respective licenses. In this paper we analyze their consequences on the speed of the innovation process. We adopt an ex ante perspective and study the impact of possible pool formation on the incentives to innovate. Because participation in the creation of a pool acts as a bonus reward on R&D activity, we show that a firm’s investment pattern is upward sloping over time before pool formation. The smaller the set of initial contributors, the higher this effect. A pool formation mechanism based on a proposal by the industry and acceptance/refusal by the competition authority may induce overinvestment in early innovations. It also leads a forward looking regulator to delay the clearance date of the pool. This may result in a pool size that is suboptimal from an ex ante viewpoint.
    Keywords: competition policy, licensing, R&D races, research and development
    JEL: L51 O32
    Date: 2007–01
  13. By: Dieter Schmidtchen (Universität des Saarlandes); Christoph Bier (Uni-Saarland - Center for the Study of Law and Economics)
    Abstract: The purpose of the paper is (1) to analyze the potential and the incentives for a vertically integrated input monopolist to engage in price-discrimination when there is downstream entry, and (2) to examine the question, whether a cost-based regulation of access charges for electricity grids enhances competition in the downstream-market. The paper shows that the incumbent will never block entry if the entrant is more efficient than the incumbent. The reason is that the input-monopolist can make more profit through input sales than it could generate by producing the downstream product itself. If the entrant does not have a cost advantage either the incumbent or the entrant gets a monopoly position. Providing for a level playing field by means of a cost-based regulation of access charges always creates competition in the downstream-market. The paper also derives the welfare effects of both the liberalization of the downstream-market and the cost-based regulation.
    Keywords: discrimination, regulation, vertical integration, electricity, access charges, sabotage,
    JEL: L L L
  14. By: Dieter Schmidtchen (Universität des Saarlandes)
    Abstract: The relationship between the Antitrust Law and the Patent, Copyright and other Intellectual Property (IP) Laws has perplexed antitrust scholars and practitioners for a long time. Intellectual property and antitrust regimes both seek to advance the economic well-being of society. However, whereas the IP laws are designed to create exclusive rights - rights that sometimes rise to the level of monopolies - in order to encourage innovation and creativity, Antitrust Law is designed to foster competition and to prevent the formation of monopolies. Finding the right balance between maintaining competition and creating incentives to innovate is no easy task. This paper emphasises a division of labour: IP law should concern itself with assigning and enforcing intellectual property rights, while Antitrust Law should concern itself with the use of those rights for anti-competitive purposes. I develop the main thesis in three parts: The first part of the paper outlines the economics of IP rights. The second part presents basics of Antitrust Law. The third part deals with some specificity of the IP/Antitrust Law interface: Reasons giving rise for special concerns are found in the areas of mergers, licensing and cross-licensing, patent pools, grant-backs, practices to extend the legal patent monopoly beyond the life of the patent, interfaces and interoperability in networks, umbrella branding, and compulsory trademark licensing. The last part of the paper summarises with a set of principles for competition policy.
    Keywords: competition policy, competition law, antitrust, intellectual property,
    JEL: L4
  15. By: Dieter Schmidtchen (Universität des Saarlandes)
    Abstract: Recently, Chr. Mantzavinos proposed a new concept for antitrust analysis drawing on theoretical developments in New Institutional Economics and Evolutionary Economics. Criticizing the policy prescriptions based on traditional microeconomics and welfare economics, Mantzavinos pleas for a rule-governed antitrust policy which mainly operates with per se rules. This paper argues that the criticism of the traditional foundations of antitrust is inadequate and that per se rules rarely work. Reality confounds the principle of per se illegality and prompted courts to use a de facto rule of reason.
    Keywords: Wettbewerbsfreiheit, evolutionärer Prozeß, Institutionen, Antitrust, per se rule, rule of reason,
    JEL: B D K

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