nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒04‒14
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. R&D incentives, compatibility and network externalities By Cerquera Dussán, Daniel
  2. Dynamic R&D incentives with network externalities By Cerquera Dussán, Daniel
  3. A Strategic Guide on Two-Sided Markets Applied to the ISP Market By Cortade, Thomas
  4. Perfect Competition By M. Ali Khan
  5. Competition and Waiting Times in Hospital Markets By Odd Rune Straume; Kurt R. Brekke; Luigi Siciliani
  6. Retail Payment Systems: What can we Learn from Two-Sided Markets? By Verdier, Marianne
  7. The Dynamics of Industry Investments By Marcel Boyer; Pierre Lasserre; Michel Moreaux
  8. X-efficiency, scale economies, Technological Progress and Competition of Pakistani’s banks By Qayyum, Abdul; Khan, Sajawal
  9. Universal Service Obligations and Competition with Asymmetric Information By Poudou, J.C.; Roland, M.; Thomas, L.
  10. Mobile Call Termination: a Tale of Two-Sided Markets By Valletti, Tommaso
  11. Jolian McHardy, Michael Reynolds and Stephen Trotter. By Jolian McHardy; Michael Reynolds; Stephen Trotter
  12. Trade Marks and Performance in UK Firms: Evidence of Schumpeterian Competition through Innovation By Christine Greenhalgh; Mark Rogers
  13. License Auctions with Royalty Contracts for (Winners and) Losers By Thomas Giebe; Elmar Wolfstetter
  14. Information Congestion: open access in a two-sided market By Simon P. Anderson; André de Palma
  15. Utilities reforms and corruption in developing countries By Antonio Estache; Ana Goicoechea; Lourdes Trujillo

  1. By: Cerquera Dussán, Daniel
    Abstract: This paper analyzes the impact of network externalities on R&D competition between an incumbent and a potential entrant. The analysis shows that the incumbent always invests more than the entrant in the development of higher quality network goods. However, the incumbent exhibits a too low level of investments, while the entrant invests too much in R&D in comparison with the social optimum. In the model entry occurs too often in equilibrium. These inefficiencies are solely due to the presence of network externalities. By choosing compatible network goods, firms do not necessarily reduce the R&D competition intensity.
    Keywords: Network externalities, Innovation, Imperfect Competition
    JEL: D21 D85 L13 O31
    Date: 2006
  2. By: Cerquera Dussán, Daniel
    Abstract: This paper studies the incentives to undertake uncertain R&D initiatives in a dynamic duopoly network industry. It is shown that network externalities positively affect the incentives to invest in R&D. In the model, competition resembles a preemption race and, therefore, market performance implies an overinvestment in R&D in comparison with the social optimum. Moreover, network externalities have an important impact in the dynamic evolution of the industry. Although in the long-run a single firm dominates the market (i.e. wins the race), short-run competition is very fierce and concentrated on neck-and-neck technological configurations. This short-run competition is fiercer and longer, the higher the level of network externalities. Policy measures that increase technological diffusion (i.e. mandatory licensing), increase the level of competition and/or prolong the short-run competition have an important positive impact on consumer welfare and on firms’ R&D incentives.
    Keywords: Network externalities, Innovation, Imperfect Competition, Dynamic Games
    JEL: C73 D85 L13 O31
    Date: 2006
  3. By: Cortade, Thomas
    Abstract: This paper looks at a new body of literature that deals with two-sided markets and focuses on the Internet Service Provider (ISP) segment. ISPs seem to act as a platform enabling transactions between web sites and end consumers. We propose a strategic guide for ISPs that covers features of two-sided markets such as strong externalities and discuss how these market characteristics can affect competition policy.
    Keywords: Platform; externalities; price allocation; competition policy.
    JEL: L51 L96 L86
    Date: 2006–03
  4. By: M. Ali Khan (The Johns Hopkins University, Baltimore, USA)
    Abstract: In his 1987 entry on ‘Perfect Competition’ in The New Palgrave, the author reviewed the question of the perfectness of perfect competition, and gave four alternative formalisations rooted in the so-called Arrow-Debreu-Mckenzie model. That entry is now updated for the second edition to include work done on the subject during the last twenty years. A fresh assessment of this literature is offered, one that emphasises the independence assumption whereby individual agents are not related except through the price system. And it highlights a ‘linguistic turn’ whereby Hayek’s two fundamental papers on ‘division of knowledge’ are seen to have devastating consequences for this research programme
    Keywords: Allocation of Resources, Perfect Competition, Exchange Economy
    JEL: D00
    Date: 2007
  5. By: Odd Rune Straume (Universidade do Minho - NIPE); Kurt R. Brekke (Department of Economics and Helth Economics Bergen, Norwegian School of Economics and Business Administration); Luigi Siciliani (Department of Economics and Centre for Health Economics, University of York, Heslington)
    Abstract: This paper studies the impact of hospital competition on waiting times. We use a Salop-type model, with hospitals that differ in (geographical) location and, potentially, waiting time, and two types of patients; high benefit patients who choose between neighbouring hospitals (competitive segment), and low-benefit patients who decide whether or not to demand treatment from the closest hospital (monopoly segment). Compared with a benchmark case of regulated monopolies, we find that hospital competition leads to longer waiting times in equilibrium if the competitive segment is sufficiently large. Given a policy regime of hospital competition, the effect of incresed competition depends on the parameter of measurement: Lower travelling costs increase waiting times, higher hospital density redices waiting times, while the effect of a larger competitive segment is ambiguous. We also show that, if the competitive segment is large, hospital competition is socially preferrable to regulated monopolies only if the (regulated) treatment price is sufficiently higher.
    Keywords: Hospitals, Competition, Waiting times
    JEL: H42 I11 I18 L13
    Date: 2007
  6. By: Verdier, Marianne
    Abstract: Some retail payment systems can be modelled as two-sided markets, where a payment system facilitates money exchanges between consumers on one side and merchants on the other. The system sets rules and standards, to ensure usage and acceptance of its payment instruments by consumers and merchants respectively. Some retail payment systems exhibit indirect network externalities, which is one of the main criteria used to define two-sided markets. As more consumers use the payment platform, more merchants are encouraged to join it. Conversely, the value of holding payment instruments increases with the number of merchants accepting them. The theory of two-sided markets contributes to a better understanding of these retail payment systems, by showing that an asymmetric allocation of costs is needed to maximise the volume of transactions. It also starts to offer results that could explain competition between payment platforms. However, this theory entails some limits to a thorough understanding of retail payment systems. Firstly, we show that some retail payment systems, such as credit transfer or direct debit systems, do not necessarily fulfil all the theoretical criteria used to define twosided markets. Moreover, this theory does not take into account specific features of the payment industry, such as risk management or fraud prevention. This leads us to propose new research directions.
    Keywords: payment systems; two-sided markets; platform competition; payment cards.
    JEL: O30 L13 D43
    Date: 2006–03
  7. By: Marcel Boyer; Pierre Lasserre; Michel Moreaux
    Abstract: We study the development of a duopoly in a continuous-time model of capacity investment under no commitment by firms regarding future actions. While capacity units are costly, indivisible, durable, and large relative to market size, early entry cannot secure a first-mover advantage and both firms are active beyond some level of market development. We evaluate the investment real options in that context. In the early industry development phase, the sole Markov Perfect Equilibrium (MPE) is a preemption equilibrium with the first industry investment occurring earlier (hence being riskier) than socially optimal. Once both firms hold capacity, tacit collusion, taking the form of postponed capacity investment, may occur as a MPE. Volatility and the expected speed of market development play a crucial role in competitive behavior: we show that the emergence of tacit collusion equilibria is favored by higher demand volatility, faster market growth, as well as by lower discount rate. <P>Nous étudions le développement d'un duopole dans un modèle en temps continu d'investissement en capacité sans engagement des firmes quant à leurs actions futures. Bien que les unités de capacité soient coûteuses, indivisibles, durables et de taille non négligeable par rapport au marché, l'entrée hâtive ne peut conférer d'avantage durable et à partir d'un certain niveau de développement du marché, les deux firmes sont en activité. Nous évaluons les options réelles d'investissement dans ce contexte. Initialement, le seul équilibre Markovien parfait (ÉMP) est un équilibre de préemption dans lequel le premier investissement en capacité se produit plus tôt et comporte un risque plus élevé que socialement désirable. Une collusion tacite pour retarder les augmentations de capacité subséquentes peut devenir possible en ÉMP. La volatilité du marché et sa vitesse de croissance jouent un rôle crucial : l'émergence d'équilibres de collusion tacite est favorisée par une volatilité plus grande, une croissance plus rapide et un taux d'intérêt ou d'actualisation plus faible.
    Keywords: real options, duopoly, preemption, collusion, lumpy investment, options réelles, duopole, préemption, collusion, investissement en bloc
    JEL: C73 D43 D92 L13
    Date: 2007–04–01
  8. By: Qayyum, Abdul; Khan, Sajawal
    Abstract: This study aims at investigating empirically the x-efficiency, scale economies, and technologicalprogress of commercial banks operating in Pakistan. As banking sector efficiency is consider as a precondition for macroeconomic stability, monetary policy execution, and economic growth.We also make efficiency comparisons between the domestic and foreign banks and big banks.Our results indicate that the domestic banks operating in Pakistan are relatively less efficient than their foreign counterparts. The scale economies for small banks, especially foreign banks are higher. Results show also that market share of big five banks are declining over the period but average interest spread shows fluctuations. The main conclusions that can be drawn from these results are that mergers are more likely to take place, especially in small banks. If the mergers do take place between small domestic banks and foreign banks, these will reduce cost due to scale economies as well as x-efficiency (because foreign banks are x-efficient relative to small domestic banks). Even if mergers do take place between small and big banks, cost will reduce with out conferring any monopolistic power to these banks. This will also help in stability of the financial sector, which an important concern of the State Bank of Pakistan SBP). So the best policy option for SBP is to encourage mergers, while keeping a check on interest spread, so that the benefits from reduction in cost due mergers are passed on to depositors and borrowers.
    Keywords: x-efficiency; scale economies; technologicalprogress; Commercial Banks; Pakistan
    JEL: G21
    Date: 2006
  9. By: Poudou, J.C.; Roland, M.; Thomas, L.
    Abstract: This paper takes into account adverse selection in the implementation of universal service obligations (USOs) for a network industry with no bypass. USOs are characterized by a coverage constraint imposed on the network’s owner. We develop fully the model for a welfare maximizing coverage constraint and explain how to adapt it for a full coverage (ubiquity) constraint. We use a market without USO as a benchmark case. We show that, because of information rents, a sufficiently high shadow cost of public funds can lead to a lower coverage with the USO than without it when firms turn out to be relatively inefficient. If the regulator is able to determine the industry structure by issuing licences to operate, the optimal number of firms reflects a trade-off between allocative efficiency and the industry capacity to finance internally the USO. The shadow cost of public funds then plays a dual role as it determines the terms of this efficiency funding trade-off in addition to the terms of the traditionnal efficiency rent trade-off.
    Keywords: universal service obligations, coverage constraints, asymmetric information, regulation
    JEL: D82 K23 L43 L51
    Date: 2007
  10. By: Valletti, Tommaso
    Abstract: Mobile telephony is described as a "two-sided" market where customers are seen as senders and receivers of communications that are mutually beneficial both to callers and receivers. This has implications in terms of market definition and market power. The economics of mobile call termination is discussed in this context.
    Keywords: mobile telephony; market definition and call termination
    JEL: L96 O30 D43
    Date: 2006–03
  11. By: Jolian McHardy (Department of Economics, The University of Sheffield); Michael Reynolds; Stephen Trotter
    Abstract: The general complexity of demand interrelationships including the co-existence of complements and substitutes make traditional methods of regulating network industries problematic. Collusive pricing is preferred to independent pricing on complementary sections of a network whilst the reverse is true where goods/services are substitutes. However, the costs of market failure in the context of complementary goods, in particular, make appropriate regulatory involvement in such industries all the more important. In this paper, we explore alternative competitive and regulatory strategies within a simple theoretical network with differentiated demands. We show that the employment of an independent profit-maximising agent may offer a partial solution to the problem of network regulation, yielding outcomes which involve all parties pursuing their own interests yet being desirable to both firms and a welfare-maximising social planner.
    Keywords: Networks, Regulation, Duopoly, Agent
    JEL: D43 L13 R48
    Date: 2007–02
  12. By: Christine Greenhalgh; Mark Rogers
    Abstract: This paper uses novel data on trade mark activity of UK manufacturing and service sector firms to investigate whether trade marks improve the profitability and productivity of firms. We first analyse Tobin`s q, the ratio of stock market value to book value of tangible assets. We then investigate the relationship between trade mark activity and productivity, using a value added production function. Finally we examine interactions between firms IP activity, to explore creative destruction and growth via innovation. We find trade marks are positively related to both Tobin`s q and to productivity. Also in the short run greater IP activity by other firms in the industry reduces the value added of the firm, but this same competitive pressure has later benefits via productivity growth, also reflected in higher stock market value. This describes the Schumpeterian process of competition through innovation, restraining profit margins while increasing product variety and quality.
    Keywords: Trade Marks, Market Value, Productivity, Manufacturing, Services
    JEL: O30 L60 L80
    Date: 2007
  13. By: Thomas Giebe (Institute of Economic Theory I, Humboldt University at Berlin Spandauer Str. 1, 10099 Berlin, Germany.; Elmar Wolfstetter (Institute of Economic Theory I, Humboldt University at Berlin Spandauer Str. 1, 10099 Berlin, Germany.–
    Abstract: This paper revisits the licensing of a non–drastic process innovation by an outside innovator to a Cournot oligopoly. We propose a new mechanism that combines a restrictive license auction with royalty licensing. This mechanism is more profitable than standard license auctions, auctioning royalty contracts, fixed–fee licensing, pure royalty licensing, and two-part tariffs. The key features are that royalty contracts are auctioned and that losers of the auction are granted the option to sign a royalty contract. Remarkably, combining royalties for winners and losers makes the integer constraint concerning the number of licenses irrelevant.
    Keywords: patents, licensing, auctions, royalty, innovation, R&D, mechanism design
    JEL: D21 D43 D44 D45
    Date: 2007–04
  14. By: Simon P. Anderson (Department of Economics, University of Virginia, PO Box 400182, Charlottesville VA 22904-4128, USA); André de Palma (Member of the Institut Universitaire de France, ThEMA, Université de Cergy- Pontoise, 33 Bd. du Port, 95011, Cergy Cedex, France.)
    Abstract: Advertising messages compete for scarce attention. “Junk” mail, “spam” e-mail, and telemarketing calls need both parties to exert effort to generate transactions. Message recipients supply attention depending on average message benefit, while senders are motivated by profits. Costlier message transmission may improve message quality so more messages are examined. Too many messages may be sent, or the wrong ones. A Do-Not-Call policy beats a ban, but too many individuals opt out. A monopoly gatekeeper performs better than personal access pricing if nuisance costs to receivers are moderate.
    Keywords: information overload, congestion, advertising, common property resource, two-sided markets, junk mail, email, telemarketing, Do Not Call List, message pricing policy.
    JEL: D11 D60 L13
    Date: 2007
  15. By: Antonio Estache; Ana Goicoechea; Lourdes Trujillo (Department of Economics, City University, London and DAEA, Universidad de Las Palmas de Gran Canaria)
    Abstract: This paper shows empirically that “privatization” in the energy, telecommunications and water sectors, and the introduction of independent regulators in those sectors, have not always had the expected effects on access, affordability or quality of services. It also shows that corruption leads to adjustments in the quantity, quality, and price of services consistent with the profit-maximizing behaviour that one would expect from monopolies in the sector. Finally, our results suggest that privatization and the introduction of independent regulators have, at best, only partial effects on the consequences of corruption for access, affordability and quality of utilities services.
    Date: 2007–04

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