nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒05‒12
24 papers chosen by
Russell Pittman
US Department of Justice

  1. Are Sunk Costs a Barrier to Entry? By Luís Cabral; Thomas Ross
  2. How (not) to measure competition By van der Wiel, Henry; Boone, Jan; van Ours, Jan C
  3. Why Are Firms Sometimes Unwilling to Reduce Costs? By X. Henry Wang; Jingang Zhao
  4. The Price Effects of Horizontal Mergers: A Survey By Matthew Weinberg
  5. An Economic Analysis of Platform Sharing By Arghya Ghosh; Hodaka Morita
  6. Competition in product design: An experiment exploring innovation behavior By Uwe Cantner; Werner Güth; Andreas Nicklisch; Torsten Weiland
  7. Competition and Waiting Times in Hospital Markets By Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
  8. Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration By Glenn Ellison; Sara Fisher Ellison
  9. Productivity growth and competition in spanish manufacturing firms: What has happened in recent years? By Agustí Segarra-Blasco; Mercedes Teruel-Carrizosa
  10. Competing with Menus of Tariff Options By Miravete, Eugenio J
  11. Reciprocity, inequity-aversion, and oligopolistic competition By Santos-Pinto, Luís
  12. Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies By Roland Kirstein; Annette Kirstein
  13. Competition and Crowding-Out among Public, Non-Profit and For-Profit Organizations: Evidence from Outpatient Substance Abuse Treatment By Andrew M. Cohen; Beth A. Freeborn; Brian McManus
  14. Lock in and Switch: Asymmetric Information and New Product Diffusion By Luis Cabral
  15. The Welfare Impact of Competition in Fixed Telephony By Toker Doganoglu; Pedro Pereira
  16. The Welfare Cost of Market Power. Accounting for Intermediate Good Firms By Geir H. Bjertnæs
  17. RP-US FTA: Trade Remedies, Competition Policy and Government Procurement By Gatdula, Atty. Jeremy; Higuit, Ever; Madarang, Rafael
  18. The Analysis of Five Competitive Forces of Non-Alcoholic Beverage Industry and E-Commerce Industry Cases at the global level By Manuel, Eduardo
  19. Making Sense of the Experimental Evidence on Endogenous Timing in Duopoly Markets By Santos-Pinto, Luís
  20. Identifying Technology Spillovers and Product Market Rivalry By Nick Bloom; Mark Schankerman; John Van Reenen
  21. Concentration Horizontale et Relations Verticales By Marie-Laure Allain; Saïd Souam
  22. Cross-Border M&As in the Financial Sector. Is Banking Different from Insurance? By Pozzolo, Alberto Franco; Focarelli, Dario
  23. Collusion in Repeated Procurement Auction: a Study of Paving Market in Japan By Rieko Ishii
  24. Taste for variety and endogenous fluctuations in a monopolistic competition model By Thomas Seegmuller

  1. By: Luís Cabral (New York University); Thomas Ross (University of British Columbia)
    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.
    Date: 2007–02
  2. By: van der Wiel, Henry; Boone, Jan; van Ours, Jan C
    Abstract: We introduce a new measure of competition: the elasticity of a firm's profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competition. Using firm-level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high policy relevance. So, just when it is needed the most PCM fails whereas PE does not. From this we conclude that PE is a more reliable measure of competition.
    Keywords: competition; concentration; measures of competition; price cost margin; profit elasticity; profits
    JEL: D43 L13
    Date: 2007–05
  3. By: X. Henry Wang (Department of Economics, University of Missouri-Columbia); Jingang Zhao
    Abstract: This paper establishes three new results for multiproduct oligopolies: 1) it presents the first explicit expression of Nash equilibria for asymmetric multiproduct oligopolies; 2) it shows that reducing a multiproduct firms cost in Bertrand oligopolies will reduce its profits if the cost-reducing unit is sufficiently small; and 3) it demonstrates that a multiproduct firm has no incentive to eliminate a product whose sales are zero. Because a single-product firm whose sales are zero is indifferent between exiting and staying, and its cost reductions always increase its profits, our results are unique to the multiproduct firm, and they suggest that extending oligopoly studies from a single product to multi-products could be as significant as the extension of calculus from a single variable to multi-variables.
    Keywords: Effect of cost reduction, multiproduct oligopoly, price competition, quantity competition
    JEL: C63 D43 L13
    Date: 2007–01–15
  4. By: Matthew Weinberg (University of Georgia)
    Abstract: This paper surveys the literature on the price effects of horizontal mergers. The majority of mergers that have been examined in the nine studies conducted over the past 22 years resulted in increased prices for both the merging parties and rival firms, at least in the short run. There is some evidence that product prices increase after mergers are announced but before they are consummated.
    Date: 2007–01
  5. By: Arghya Ghosh; Hodaka Morita
    Abstract: We explore the managerial implications and economic consequences of platform sharing under models of horizontal and vertical product differentiation. By using a common platform across different products, firms can save on fixed costs for platform development. At the same time, platform sharing imposes restrictions on firms' ability to differentiate their products, and this reduces their profitability. It might appear that platform sharing across firms makes consumers worse off because firms cooperate in their product development processes to maximize their joint profit. We find, however, that platform sharing across firms benefits consumers in our framework because it intensifies competition in our horizontal differentiation model, and because it increases the quality of the lower-end product in our vertical differentiation model. We also show new channels through which a merger makes consumers worse off in the presence of platform sharing.
    JEL: D40 L10 L40 M20
    Date: 2007–04
  6. By: Uwe Cantner (University of Jena, School of Busniess and Economics); Werner Güth (Max Planck Institute of Economics Jena, Strategic Interaction Unit); Andreas Nicklisch (Max Planck Institute for Research on Collective Goods, Bonn, Germany); Torsten Weiland (Max Planck Institute of Economics Jena, Strategic Interaction Unit)
    Abstract: We experimentally investigate competition in innovation in a patent race scenario. Pairs of subjects compete as seller firms on a duopoly market, engaging in risky search investments. Successful innovation is rewarded through temporary monopoly rents. Throughout the interaction, subjects receive feedback on own and other’s search success and profit margin. Partitioning subjects into subgroups of investor types reveals that the majority of subjects condition investments on the degree of competition as measured by sales shares, while for others no correlation is ascertained. Heterogeneity in individual risk attitudes and differing experiences with related search tasks may explain this finding.
    Keywords: innovation, competition, imitation, patent race
    JEL: D81 L11 O31
    Date: 2007–05–07
  7. By: Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
    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 increased competition depends on the parameter of measurement: Lower travelling costs increase waiting times, higher hospital density reduces 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 preferable to regulated monopolies only if the (regulated) treatment price is sufficiently high.
    Keywords: competition; hospitals; waiting times
    JEL: H42 I11 I18 L13
    Date: 2007–05
  8. By: Glenn Ellison; Sara Fisher Ellison
    Abstract: This paper develops a new approach to testing for strategic entry deterrence and applies it to the behavior of pharmaceutical incumbents just before they lose patent protection. The approach involves looking at a cross-section of markets and examining whether behavior is nonmonotonic in the size of the market. Under certain conditions, investment levels will be monotone in market size if firms are not influenced by a desire to deter entry. Strategic investments, however, may be nonmonotone because entry deterrence is unnecessary in very small markets and impossible in very large ones, resulting in overall nonmonotonic investment. The pharmaceutical data contain advertising, product proliferation, and pricing information for a sample of drugs which lost patent protection between 1986 and 1992. Among the findings consistent with an entry deterrence motivation are that incumbents in markets of intermediate size have lower levels of advertising and are more likely to reduce advertising immediately prior to patent expiration.
    JEL: L13 L65
    Date: 2007–04
  9. By: Agustí Segarra-Blasco (Grup de Recerca d'Indústria i Territori (GRIT), Department d'Economia, Universitat Rovira i Virgili); Mercedes Teruel-Carrizosa (Grup de Recerca d'Indústria i Territori (GRIT), Department d'Economia, Universitat Rovira i Virgili)
    Abstract: This paper addresses the issue of the relationship between productivity and market competition. In comparison to the economies of other European countries, the Spanish economy has been growing, while productivity growth has stagnated. Here we provide empirical evidence about the relationship between productivity and market competition from Spanish manufacturing firms at firm level between 1994 and 2004. Correcting for selection bias, our study pays special attention to the patterns of productivity growth between openness and non-openness firms. When market competition increases the effect on firms operating in domestic markets is positive but when the level of competition is high incentives to invest in innovation and productivity gains disappear. The empirical relationship between competition and productivity is an inverted U-shape, where productivity growth is highest at intermediate levels of competition. The productivity growth of firms operating in international markets is higher than that of non-openness firms, but when market competition rises they moderate their productivity growth. Our empirical results suggest that the correct competition policy in the Spanish economy should remove the barriers to competition in internal markets in order to increase the incentives for manufacturing firms to invest in innovation and productivity growth.
    Keywords: Manufacturing industries, innovation, competitiveness, international trade, Heckman equation
    JEL: L25 O14 O33
    Date: 2006–12
  10. By: Miravete, Eugenio J
    Abstract: I study how firms actually compete in nonlinear tariffs by analyzing whether the incumbent and entrant's decisions to offer a given number of tariff options are interrelated. The goal is to shed some light on those dynamic and strategic aspects of tariff menus that are currently ignored by theoretical models of nonlinear pricing competition in order to highlight some basic features of the market that future theoretical work should address. This paper also introduces a generalized multivariate count data model that allows me to account for the possibility of correlation of any sign among the pricing decisions of competing firms in a manner that is robust to the existence of over and underdispersion of counts. Pricing strategies appear to be strategic complements that respond positively to the existing heterogeneity of consumers' tastes. While this is a common source driving the number of tariff options offered, results also show that previous pricing decisions by the incumbent affect the entrant's current offering of tariff options, thus implying free riding by the entrant on information about the market revealed by the likely better informed firm of the industry. The strategic complementarity result disappears when I only consider non-dominated tariffs.
    Keywords: Bivariate Count Data Regression; Nonlinear Pricing Competition; Strategic Complementarity; Tariff Menus
    JEL: C35 D43 M21
    Date: 2007–05
  11. By: Santos-Pinto, Luís
    Abstract: This paper extends the Cournot and Bertrand models of strategic interaction between firms by assuming that managers are not only profit maximizers, but also have preferences for reciprocity or are averse to inequity. A reciprocal manager responds to unkind behavior of rivals with unkind actions, while at the same time, it responds to kind behavior of rivals with kind actions. An inequity averse manager likes to reduce the difference between own profits and the rivals’ profits. The paper finds that if firms with reciprocal managers compete à la Cournot, then they may be able to sustain “collusive” outcomes under a constructive reciprocity equilibrium. By contrast, Stackelberg warfare may emerge under a destructive reciprocity equilibrium. If there is Cournot competition between firms and their managers are averse to advantageous (disadvantageous) inequity, then firms are better (worse) off than if managers only care about maximizing profits. If firms compete à la Bertrand, then only under very restrictive conditions will managers’ preferences for reciprocity or inequity aversion have an impact on equilibrium outcomes.
    Keywords: Reciprocity; Inequity Aversion; Cournot; Bertrand.
    JEL: D43 D63 L21 L13
    Date: 2006–05–17
  12. By: Roland Kirstein (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Annette Kirstein
    Abstract: The instability of Cournot cartels can be overcome by a collective wage agreement if this agreement stipulates minimum fixed wages and piece rates that are legally enforceable. This new view on the institution of collective wage agreements is not only relevant for strategic management, it also has an important implication for economic policy: competition authorities should observe such agreements for their potentially collusive effect on product markets. Moreover, the model contributes to the explanation of the “fixed wage puzzle”, i.e., the observation that firms pay lower than efficient variable wages and higher fixed wages than predicted by contract theory.
    Keywords: Piece rate, fixed wage, collective wage agreements
    JEL: C72 C78 D43 J33 J50 K31 L41
    Date: 2007–02
  13. By: Andrew M. Cohen (Federal Reserve Board of Governors); Beth A. Freeborn (Department of Economics, College of William and Mary); Brian McManus (Olin School of Business, Washington University)
    Abstract: U.S. markets for outpatient substance abuse treatment (OSAT) include clinics that are private for-profit, private non-profit, and public (i.e., government-run). We study the market structure of OSAT using recently-developed methods from the empirical industrial organization literature on equilibrium market structure in differentiated product markets. These methods allow us to describe OSAT clinics as heterogeneous in their objectives, their responses to exogenous market characteristics, and their responses to one another. We find that the presence of a public clinic in a market reduces the probability that a private clinic will also participate in the market, which is consistent with crowding-out between public and private provision of OSAT. Crowding out appears to be more prevalent in markets with larger white populations.
    Keywords: discrete games, multiple equilibria, structural estimation, healthcare markets, substance abuse treatment, crowding out
    JEL: C35 C72 H4 I1 L1 L3
    Date: 2007–05–04
  14. By: Luis Cabral
    Date: 2007
  15. By: Toker Doganoglu (University of Munich); Pedro Pereira (Autoridade da Concorrência)
    Abstract: In Portugal, fixed telephony was liberalized in 2000. In this article, we estimate the impact on prices and consumer welfare of the liberalization process. We use a panel of household level data to estimate a structural model of demand for duration and number of calls of fixed telephony services. We focus on local and national peak period calls. The demand for duration is inelastic. Given these estimates, we perform several simulation exercises. Our results indicate that the per consumer average monthly gain of switching from the basic tariff plan of the incumbent to an alternative tariff plan is of about 70 cents. For some consumers, these gains could be as large as 2 euros.
    Keywords: Fixed Telephony, Liberalization, Prices
    JEL: L25 L51 L96
    Date: 2006–06
  16. By: Geir H. Bjertnæs (Statistics Norway)
    Abstract: The market power of firms in intermediate good markets is found to generate a substantial welfare cost. Markup pricing of intermediate good firms contributes to increase the wedge between the marginal product of labor and the wage rate received by workers, as intermediate good firms add additional markups to the unit cost of a consumer good. This creates an additional wedge in the labor market, and is costly due to the existing substantial tax wedge in the labor market. The welfare cost of distortions in the supply of labor created by market power of firms is found to be more than 40 times larger than the welfare cost of distortions in the allocation of consumer goods created by differences in market power of firms. This welfare cost is substantial compared to previous estimates.
    Keywords: Monopoly; Taxation; Welfare costs
    JEL: D60 H20
    Date: 2007–04
  17. By: Gatdula, Atty. Jeremy; Higuit, Ever; Madarang, Rafael
    Abstract: This paper was designed to provide a policy guide in the formulation of the country’s position for RP-US FTA negotiations. After sieving through the relevant treaties and legislation in both the US and the Philippines, it was concluded that the implementation of treaty commitments in trade remedies, competition policy and government procurement in an FTA scenario with the US would be a highly technical endeavor for which the Philippines may not yet have the sufficient competencies to thoroughly comply. Thus, the provisions that shall come out of the final negotiations, if the same do push through, should not bind the Philippines to specific treaty commitments that, in the long run, the country may not be able to enforce and properly abide by. Also, these possible treaty commitments should not exceed the country’s existing international agreements and domestic laws so as not to burden the Philippines with another set of compliance requirements-–which may divert attention from the primary FTA objective of paving wider opportunities for Philippine products to enter the US market and gearing Philippine industries towards better competitiveness.
    Keywords: World Trade Organization, competition policy, government procurement, free trade agreement (FTA), safeguard measures, anti-dumping, countervailing measures
    Date: 2006
  18. By: Manuel, Eduardo
    Abstract: This paper has as objective to do an analysis of five competitive forces of non-alcoholic industry and e-commerce industry at the global level. The state of five competitive forces in both industries will depend always of evolution of these industries and government policies of the different countries of the world. For example if these industries are growing and if the govern permit others companies can enter into industry and can help to promote the competition in these industries, that is good for buyers, because they can choose where want to purchase something and what products or goods are according to their necessities or that permits to maximize their utility and it is according to their money amount available for it.
    Keywords: Industry; Non-alcoholic beverage industry; E-Commerce industry; Five competitive forces
    JEL: L81 L69 D29 A23 M19 L29 L19
    Date: 2007–04–14
  19. By: Santos-Pinto, Luís
    Abstract: The prediction of asymmetric equilibria with Stackelberg outcomes is clearly the most frequent result in the endogenous timing literature. Several experiments have tried to validate this prediction empirically, but failed to find support for it. By contrast, the experiments find that simultaneous-move outcomes are modal and that behavior in endogenous timing games is quite heterogeneous. This paper generalizes Hamilton and Slutsky’s (1990) endogenous timing games by assuming that players are averse to inequality in payoffs. I explore the theoretical implications of inequity aversion and compare them to the empirical evidence. I find that this explanation is able to organize most of the experimental evidence on endogenous timing games. However, inequity aversion is not able to explain delay in Hamilton and Slutsky’s endogenous timing games.
    Keywords: Endogenous Timing; Cournot; Stackelberg; Inequity Aversion.
    JEL: D43 D63 L13 C72
    Date: 2006–02–06
  20. By: Nick Bloom; Mark Schankerman; John Van Reenen
    Abstract: Support for R&D subsidies relies on empirical evidence that R&D "spills over" between firms. But firm performance is affected by two countervailing R&D spillovers: positive effects from technology spillovers and negative business stealing effects from R&D by product market rivals. We develop a general framework showing that technology and product market spillovers have testable implications for a range of performance indicators, and then exploit these using distinct measures of a firm's position in technology space and product market space. Using panel data on U.S. firms between 1980 and 2001 we show that both technology and product market spillovers operate, but technology spillovers quantitatively dominate. The spillover effects are also present when we analyze three high tech sectors in finer detail. Using the model we evaluate the net spillovers from three alternative R&D subsidy policies.
    JEL: F23 L1 O31 O32 O33
    Date: 2007–04
  21. By: Marie-Laure Allain (LEEP - Laboratoire d'econometrie de l'école polytechnique - [CNRS : UMR7657] - [Polytechnique - X]); Saïd Souam (CEPN - Centre d'économie de l'Université de Paris Nord - [CNRS : UMR7115] - [Université Paris-Nord - Paris XIII])
    Abstract: Cet article s'intéresse aux concentrations horizontales dans des marchés reliés verticalement. Dans un modèle de concurrence à la Cournot à deux niveaux, où les transactions se font par l'intermédiaire d'un marché, on montre que des fusions horizontales engendrant des effets de taille sont, toutes choses égales par ailleurs, plus profitables en aval qu'en amont. De plus, la concentration dans un secteur réduit les incitations à la fusion dans l'autre secteur. L'endogénéisation des décisions de fusion conserve ces résultats.
    Keywords: fusions horizontales ; relations verticales ; contrôle des concentrations.
    Date: 2007–04–27
  22. By: Pozzolo, Alberto Franco; Focarelli, Dario
    Abstract: This paper investigates what factors might help explain the internationalization strategy of banks and insurance companies, by comparing the determinants of cross-border M&As in the two sectors in a unified framework. The empirical analysis shows that between 1990 and 2003 the internationalization of banks and insurance companies followed similar patterns. Distance and economic and cultural integration are important determinants for both the banks’ and the insurance companies’ expansion abroad. Comparative advantage also has a prominent role, the more so for banks. The evidence is less supportive of the view that cross-border M&As are more frequent between similar countries, as predicted by the new trade theory. Finally, and most interestingly, we find indirect evidence consistent with the hypothesis that implicit barriers to foreign entry are more important in explaining the behavior of banks than that of insurance companies.
    Keywords: international banking and insurance, foreign direct investment
    JEL: E30 G21 G22 F21 F23
    Date: 2007–04–10
  23. By: Rieko Ishii (Institute of Social and Economic Research, Osaka University)
    Abstract: We present an econometric approach to the problem of detecting bid rigging in procurement auctions using bidding data for paving works in Ibaraki City, Osaka, Japan. We first show that sporadic price wars are caused by the participation of potential goutsiders.h Assuming that the ring is all-inclusive in the absence of these outsiders, we estimate the rule by which the ring selects the winner. It is found that the ring tends to select a bidder whose time elapsed from the last winning is long and whose winning amount in the past is small relative to other bidders.
    Keywords: Bid rigging, repeated auction.
    JEL: D44 H57 L44
    Date: 2007–05
  24. By: Thomas Seegmuller (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: In past years, imperfect competition has been introduced in several dynamic models to show how mark-up variability, increasing returns (decreasing marginal cost) and monopoly profits affect the occurence of endogenous fluctuations. In this paper, we focus on another possible feature of imperfectly competitive economies : consumers' taste for variety due to endogenous product diversity. introducing monopolistic competition (Dixit and Stiglitz (1977), Benassy (1996)) in an overlapping generations model where consumers have taste for variety, we show that local indeterminacy can occur under the three following conditions : a high substitution between capital and labor, increasing returns arbitrarily small and a not too elastic labor supply. The key mechanism for this result is based on the fact that, due to taste for variety, the aggregate price decreases with the pro-cyclical product diversity which has a direct influence on the real wage and the real interest rate.
    Keywords: Endogenous fluctuations, taste for variety, imperfect competition.
    Date: 2007–04–25

This nep-com issue is ©2007 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.