nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒03‒31
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Market Games and Successive Oligopolies By Jean J. GABSZEWICZ; Didier, LAUSSEL; Tanguy, VAN YPERSELE; S, ZANAJ
  2. Market Efficiency and Coalition Structures By David Bartolini
  3. Wholesale Markets in Telecommunications By Bourreau, Marc; Hombert, Johan; Pouyet, Jérôme; Schutz, Nicolas
  4. Delegating Infrastructure Projects with Open Access By Keizo Mizuno; Testuya Shinkai
  5. Agent-Based Model of Price Competition and Product Differentiation on Congested Networks By Lei Zhang; David Levinson; Shanjiang Zhu
  6. Bargaining in Mergers and Termination Fees By Rosenkranz, Stephanie; Weitzel, Utz
  7. Intermediation and Investment Incentives By Belleflamme, Paul; Peitz, Martin
  8. Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity By Doraszelski, Ulrich; Satterthwaite, Mark
  9. The Effects of ITQ Management on Fishermen’s Welfare When the Processing Sector is Imperfectly Competitive By David M. McEvoy; Sylvia Brandt; Nathalie Lavoie; Sven Anders
  10. Real Options With Uncertain Maturity and Competition By Kristian R. Miltersen; Eduardo S. Schwartz
  11. Exclusive versus Non-exclusive Licensing Strategies and Moral Hazard By Schmitz, Patrick W.
  12. The Race for Telecoms Infrastructure Investment with Bypass: Can Access Regulation Achieve the First-best? By Bastos Vareda, João Miguel; Hoernig, Steffen
  13. Economics and the design of patent systems By Robert M. Hunt
  14. Entry, Exit and Productivity: Empirical Results for German Manufacturing Industries By Joachim Wagner
  15. Network Neutrality: Lessons from Transportation By David Levinson
  16. Do scale alliances with competitors improve product performace? A study of the Aircraft industry, 1949-2000 By GARRETTE, Bernard; DUSSAUGE, Pierre; CASTANER, Xavier; MULOTTE, Louis
  17. Concentración y Competencia en el Sistema Financiero Crediticio Colombiano en la Ültimna Década By Ricardo Bernal Fandiño

    Abstract: This paper first introduces an approach relying on market games to examine how successive oligopolies do operate between downstream and upstream markets. This approach is then compared with the traditional analysis of oligopolistic interaction in successive markets. The market outcomes resulting from the two approaches are analysed under different technological regimes, decreasing vs constant returns
    Keywords: D43, L1, L13, L22
    Date: 2007–03–26
  2. By: David Bartolini
    Abstract: We consider a three-stage game in which symmetric firms decide whether to invest in a cost-reducing technology, then they have the possibility to merge (forming coalitions), and eventually, in the third stage, a Cournot oligopoly game is played by the resulting firms (coalitions). We show that, contrary to the existing literature, the monopoly market structure may fail to form even when the number of initial firms is just three. We then introduce a weighted sharing rule and show that a situation in which all firms acquire the cost-reducing asset cannot be sustained as a Subgame Perfect Equilibrium.
    Date: 2007–03–28
  3. By: Bourreau, Marc; Hombert, Johan; Pouyet, Jérôme; Schutz, Nicolas
    Abstract: In telecommunications some operators have deployed their own networks whereas some others have not. The latter firms must purchase wholesale products from the former to be able to compete on the final market. We show that, even when network operators compete in prices and offer perfectly homogenous products on the wholesale market, that market may not be competitive. Based on our theoretical analysis, we derive some policy implications for the broadband and the mobile telephony markets.
    Keywords: telecommunications; upstream and downstream markets; vertical integration
    JEL: L13 L51
    Date: 2007–03
  4. By: Keizo Mizuno (School of Businiess Administration, Kwansei Gakuin University); Testuya Shinkai (School of Economics, Kwansei Gakuin University)
    Abstract: This paper provides a simple model that examines a firmfs incentive to invest in a network infrastructure through coalition formation in an open access environment with a deregulated retail market. A regulator faces a dilemma between inducing an incentive for efficient investment and reducing the distortion generated by imperfect competition. We show that, in such a case, the degree of cost-reducing effect of the investment is crucial from a welfare point of view. In particular, when network investment through coalition formation creates a large (small) cost-reducing effect, the regulator can (should not) delegate an investment decision to firms with an appropriate level of access charge.
    Keywords: Network infrastructure, Coalition, Access Charge, Delegation
    JEL: L13 L22 L43 L90
    Date: 2006–01
  5. By: Lei Zhang; David Levinson; Shanjiang Zhu (Nexus (Networks, Economics, and Urban Systems) Research Group, Department of Civil Engineering, University of Minnesota)
    Abstract: Using consistent agent-based techniques, this research models the decision-making processes of users and infrastructure owner/operators to explore the welfare consequence of price competition, capacity choice, and product differentiation on congested transportation networks. Component models include: (1) An agent-based travel demand model wherein each traveler has learning capabilities and unique characteristics (e.g. value of time); (2) Econometric facility provision cost models; and (3) Representations of road authorities making pricing and capacity decisions. Different from small-network equilibrium models in prior literature, this agent-based model is applicable to pricing and investment analyses on large complex networks. The subsequent economic analysis focuses on the source, evolution, measurement, and impact of product differentiation with heterogeneous users on a mixed ownership network (with tolled and untolled roads). Two types of product differentiation in the presence of toll roads, path differentiation and space differentiation, are defined and measured for a base case and several variants with different types of price and capacity competition and with various degrees of user heterogeneity. The findings favor a fixed-rate road pricing policy compared to complete pricing freedom on toll roads. It is also shown that the relationship between net social benefit and user heterogeneity is not monotonic on a complex network with toll roads.
    Keywords: Network dynamics, road pricing, autonomous links, privatization, price competition, product differentiation, agent-based transportation model
    JEL: R40 R42 R48 D10 D21 D23 D24 D43 D83 D85 H21 H23 H44 L92 O33 C72
    Date: 2007
  6. By: Rosenkranz, Stephanie; Weitzel, Utz
    Abstract: We model takeovers as a bargaining process and explain termination fees for, both, the target and the acquirer, subject to parties’ bargaining power and outside options. In equilibrium, termination fees are offered by firms with outside options in exchange for a greater share of merger synergies. Termination fees decrease in firms’ bargaining power, and increase in firms’ outside options. We find that a merger with the second highest bidder, including a termination fee, can lead to equally high premiums as a merger with the highest bidder, without a termination fee. This novel result directly contrasts the agency cost perspective, which argues that termination provisions may be used by managers to lock into acquirers that do not generate the highest shareholder value. Further, even in a merger with the highest bidder and in the absence of bidding related costs, a termination fee is not necessarily a deal protection device, but can be used to improve shareholder value. Our bargaining model offers an alternative to auction related explanations of termination fees, like cost compensation or seller commitment.
    Keywords: bargaining; break-up fees; lockups; mergers and acquisitions; outside option; termination fees
    JEL: C71 C78 D44 G34 K22
    Date: 2007–03
  7. By: Belleflamme, Paul; Peitz, Martin
    Abstract: We analyze whether and how the fact that products are not sold on open or public platforms but on competing for-profit platforms affects sellers’ investment incentives. Investments in cost reduction, quality, or marketing measures are here the joint and coordinated efforts by sellers. We show that, in general, for-profit intermediation is not neutral to such investment incentives. As for-profit intermediaries reduce the rents that are available in the market, one might suspect that sellers have weaker investment incentives with competing for-profit platforms. However, this is not necessarily the case. The reason is that investment incentives affect the size of the network effects and thus competition between intermediaries. In particular, we show that whether for-profit intermediation raises or lowers investment incentives depends on which side of the market singlehomes.
    Keywords: intermediation; investment incentives; network effects; two-sided markets
    JEL: D40 L10
    Date: 2007–03
  8. By: Doraszelski, Ulrich; Satterthwaite, Mark
    Abstract: We provide a general model of dynamic competition in an oligopolistic industry with investment, entry, and exit. To ensure that there exists a computationally tractable Markov perfect equilibrium, we introduce firm heterogeneity in the form of randomly drawn, privately known scrap values and setup costs into the model. Our game of incomplete information always has an equilibrium in cutoff entry/exit strategies. In contrast, the existence of an equilibrium in the Ericson & Pakes (1995) model of industry dynamics requires admissibility of mixed entry/exit strategies, contrary to the assertion in their paper, that existing algorithms cannot cope with. In addition, we provide a condition on the model's primitives that ensures that the equilibrium is in pure investment strategies. Building on this basic existence result, we first show that a symmetric equilibrium exists under appropriate assumptions on the model's primitives. Second, we show that, as the distribution of the random scrap values/setup costs becomes degenerate, equilibria in cutoff entry/exit strategies converge to equilibria in mixed entry/exit strategies of the game of complete information. Finally, we provide the first example of multiple symmetric equilibria in this literature.
    Keywords: dynamic oligopoly; industry dynamics; Markov perfect equilibrium
    JEL: C73 L13
    Date: 2007–03
  9. By: David M. McEvoy (Department of Resource Economics, University of Massachusetts Amherst); Sylvia Brandt; Nathalie Lavoie (Department of Resource Economics, University of Massachusetts Amherst); Sven Anders (Department of Rural Economy, University of Alberta Edmonton)
    Abstract: In this paper we use a general model of imperfect competition to predict welfare changes within an open-access fishery transitioning to individual transferable quota (ITQ) management. Although related research has explored the effects of market power in the harvesting sector on ITQ performance, none have considered the implications of an imperfectly competitive processing sector. This study addresses this question specifically in the context of the Atlantic herring fishery, although its implications are relevant to all fisheries with similar industry structure. Our results show that ITQs could have a negative impact on fishermen’s welfare when processors have market power and the cap on aggregate harvest is binding or becomes binding with the implementation of ITQs.
    Keywords: ITQ, imperfect competition, welfare analysis, fisheries
    JEL: D43 Q22 Q28 L13
  10. By: Kristian R. Miltersen; Eduardo S. Schwartz
    Abstract: We develop a new approach to dealing with real options problems with uncertain maturity. This type of situation is typical for R&D investments and mine or oil exploration projects. These types of projects are characterized by significant on-going investment costs until completion. Since time to completion is uncertain, the total investment costs will also be uncertain. Despite the fact that these projects include complicated American abandonment/switching options until completion and European options at completion (because of fixed final investment costs) we obtain simple closed form solutions. We apply the framework to situations in which the owner of the project has monopoly rights to the outcome of the project, and to situations in which there are two owners who simultaneously invest, but where only one of them may obtain the rights to the outcome. We expand the real options framework to incorporate game theoretic considerations, including a generalization of mixed strategies to continuous-time models in the form of abandonment intensities.
    JEL: G13 G31
    Date: 2007–03
  11. By: Schmitz, Patrick W.
    Abstract: An upstream firm can license its innovation to downstream firms that have to exert further development effort. There are situations in which more licenses are sold if effort is a hidden action. Moral hazard may thus increase the probability that the product will be developed.
    Keywords: Innovation; Licences; Monopoly; Private information
    JEL: D45 D82 L12
    Date: 2007–03
  12. By: Bastos Vareda, João Miguel; Hoernig, Steffen
    Abstract: We analyze the impact of mandatory access on the infrastructure investments of two competing communications networks, and show that for low (high) access charges firms wait (preempt each other). Contrary to previous results, under preemption a higher access charge can delay first investment. Constant access tariffs cannot achieve the first best. Optimal time-variant access tariffs may be increasing or decreasing over time. The first-best cannot be achieved at all through access tariff regulation if the follower’s private incentives are dominated by business-stealing. Here access holidays can improve welfare by allowing for lower future access charges, which delay the second investment.
    Keywords: Access holidays; Investments; Preemption; Time-variant access charges
    JEL: D92 L43 L51 L96
    Date: 2007–03
  13. By: Robert M. Hunt
    Abstract: The author uses intuition derived from several of his research papers to make three points. First, in the absence of a common law balancing test, application of uniform patentability criteria favors some industries over others. Policymakers must decide the optimal tradeoff across industries. Second, if patent rights are not closely related to the underlying inventions, more patenting may reduce R&D in industries that are both R&D and patent intensive. Third, for reasons largely unrelated to intellectual property, the U.S. private innovation system has become far more decentralized than it was a generation ago. It is reasonable to inquire whether a patent system that worked well in an era of more centralized innovation functions as well for the more decentralized environment of today.
    Date: 2007
  14. By: Joachim Wagner (University of Lueneburg and IZA)
    Abstract: Using panel data from Spain Farinas and Ruano (IJIO 2005) test three hypotheses from a model by Hopenhayn (Econometrica 1992): (H1) Firms that exit in year t were in t-1 less productive than firms that continue to produce in t. (H2) Firms that enter in year t are less productive than incumbent firms in year t. (H3) Surviving firms from an entry cohort were more productive than non-surviving firms from this cohort in the start year. Results for Spain support all three hypotheses. This paper replicates the study using unique newly available panel data sets for all manufacturing plants from Germany (1995-2002). Again, all three hypotheses are supported empirically.
    Keywords: entry, exit, productivity
    JEL: L11 L60
    Date: 2007–03
  15. By: David Levinson (Nexus (Networks, Economics, and Urban Systems) Research Group, Department of Civil Engineering, University of Minnesota)
    Abstract: The politically-charged notion of network neutrality came to the fore in 2005 and 2006, using analogy from transportation as one of the key tools in motivating arguments. This paper examines how the various notions around network neutrality (common carriage, regulation, price discrimination) have played out in the transportation sector, and suggests many of the current arguments fail to understand the nuances of how complex networks actually operate to serve the many demands placed on them.
    JEL: R41 R42 R48 N71 N74 H41
    Date: 2007
  16. By: GARRETTE, Bernard; DUSSAUGE, Pierre; CASTANER, Xavier; MULOTTE, Louis
    Abstract: This paper investigates the performance impact of undertaking activities through scale alliances with competitors rather than undertaking these activities autonomously.
    Keywords: strategy; governance; alliance; cooperation; performance; scale economies; aircraft
    JEL: D74 L24
    Date: 2007–02–01
  17. By: Ricardo Bernal Fandiño
    Abstract: Este trabajo estudia la relación entre los aumentos en la concentración y las dinámicas de competencia del sector financiero crediticio de los últimos años en la economía colombiana. Se encuentra que a pesar de los incrementos en la concentración que reflejan diversos indicadores analizados, el nivel de poder de mercado -medido como el estadístico H de Panzar y Rose (1987) por medio de un análisis de panel de datos- no se ha deteriorado en el periodo 1995-2005. Más aún, existen indicios por los cuales este nivel de competencia se ha incrementado en el periodo, una vez se ha controlado por variables específicas a la entidad así como por variables exógenas macroeconómicas.
    Date: 2007–03–15

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