nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒06‒02
twelve papers chosen by
Russell Pittman
US Department of Justice

  1. Can price discrimination lead to product differentiation? A vertical differentiation model By Fabian Herweg
  2. The Ex Ante Auction Model for the Control of Market Power in Standard Setting Organizations By Geradin, Damien; Layne-Farrar, Anna; Padilla, Atilano Jorge
  3. Market power in oligopoly: The case of the Ukrainian cement industry By Isayenko Oleksiy; Maryanchyk Ivan
  4. The reaction by industry insiders to M&As in the European financial industry By José M. Campa; Ignacio Hernando
  5. Italy-Assessing Competition and Efficiency in the Banking System By Andrea M. Maechler; Sandra Marcelino; Paulo Flavio Nacif Drummond
  6. Demand for Bank Services and Market Power in Brazilian Banking By Márcio I. Nakane; Leonardo S. Alencar; Fabio Kanczuk
  7. Regulating a Multi-Utility Firm By Calzolari, Giacomo; Scarpa, Carlo
  8. Too Many Bargainers Spoil The Broth: The Impact of Bargaining on Markets with Price Takers By David Gill; John Thanassoulis
  9. Multi-Purpose Consumption and Functional Differentiation: Why has the Vibrant Galleria replaced the Good Old Fashioned Department Store? By Sällström Matthews, S.E.
  10. Pricing strategies in software platforms : video consoles vs. operating systems By María Fernanda Viecens
  11. Visualization of Competitive Market Structure by Means of Choice Data By Werner Kunz
  12. The Role of Consumer's Risk Aversion on Price Redigity By Sergio A. Lago Alves; Mirta N. S. Bugarin

  1. By: Fabian Herweg
    Abstract: In this paper, I compare two-part tariff competition to linear pricing in a vertically differentiated duopoly. Consumers have identical tastes for quality but differ in their preferences for quantity. The main finding is that quality differentiation occurs in equilibrium if and only if two-part tariffs are permitted. Furthermore, two-part tariff competition encourages entry, which in turn increases welfare. Nevertheless, two-part tariff competition decreases consumers' surplus compared to linear pricing.
    Keywords: Duopoly, Two-part tariff, Vertical differentiation
    JEL: D43 L11 L13
  2. By: Geradin, Damien; Layne-Farrar, Anna; Padilla, Atilano Jorge
    Abstract: RAND commitments - i.e., promises to license on reasonable and non-discriminatory terms - play a key role in standard setting processes. However, the usefulness of those commitments has recently been questioned. The problem allegedly lies in the absence of a generally agreed test to determine whether a particular license satisfies a RAND commitment. Swanson and Baumol have suggested that "the concept of a ‘reasonable’ royalty for purposes of RAND licensing must be defined and implemented by reference to ex ante competition." In their opinion, a royalty should be deemed 'reasonable' when it approximates the outcome of an ex ante auction process where IP owners submit RAND commitments coupled with licensing terms and selection to the standard is based on both technological merit and licensing terms. In this paper we investigate whether the ex ante auction approach proposed by Swanson and Baumol is likely to deliver efficient outcomes, both from static and dynamic standpoints. We find that given the peculiar characteristics of some of the industries where standardization takes place, in particular the many different business models adopted by innovating companies in those industries, the ex ante auction approach proposed by Swanson and Baumol may not always deliver the right outcomes from a social welfare viewpoint.
    Keywords: auctions; fairness; licensing; standard setting
    JEL: K21 L24
    Date: 2007–05
  3. By: Isayenko Oleksiy; Maryanchyk Ivan
    Abstract: The object under consideration is the Ukrainian cement industry, which has undergone a serious change in many dimensions, including ownership structure and market structure. We analyze the dynamics of the output market structure and test the hypothesis of a possible collusive behavior introduced by a change in the ownership structure, especially by the big international cement players entering the market. Empirical results point towards intensified competition and reject the hypothesis of the collusion. Unconstrained capacities and dynamic property redistribution make tacit collusion very unstable and demand further optimization of production process. Patterns of interregional trade, exporting behavior and mergers' dynamics pose questions about the validity of the profit-maximizing behavior assumption.
    Keywords: Ukraine, cement, collusion
    JEL: D21 D24 D43 L10 L13 L61
    Date: 2006–11–25
  4. By: José M. Campa (IESE Business School); Ignacio Hernando (Banco de España)
    Abstract: This paper looks at the reaction by industry insiders, industry analysts and competing firms, to the announcement of M&As that took place in the European Union financial industry in the period 1998-2006. Analysts covering firms involved in an M&A transaction do not significantly alter their recommendation. This is consistent with the hypothesis that the transaction on average is "fairly priced" and that stock market prices reflect all relevant information on the assets. We also find that the correlation between excess returns for merging and competing firms is positive and, in some cases, significantly higher for domestic mergers than for international deals. This is consistent with the idea that domestic deals are more likely to have a negative impact on industry competition.
    Keywords: mergers and acquisitions, analysts recommendations, rival firms
    JEL: G20 G34
    Date: 2007–05
  5. By: Andrea M. Maechler; Sandra Marcelino; Paulo Flavio Nacif Drummond
    Abstract: The paper assesses the degree of banking competition and efficiency in Italy?over time as well as compared to that in other countries, such as France, Germany, Spain, the United Kingdom, and the United States. The paper finds competition in the Italian banking sector has intensified in loan and deposit markets in recent years, but banks still operate in a highcost, high-income system, particularly with respect to retail/services, and efficiency gains have yet to fully materialize. The degree of competition falls within the range of estimates for a set of comparator countries. Greater contestability should act as a powerful force to drive banks to become more competitive and efficient. Competition policy will also continue to be an important consideration, both in enforcing Italy's antitrust laws and in ensuring that the procedures for dealing with weak banks and other merger and acquisition reviews focus on stability and competition objectives.
    Keywords: Banking systems , Italy , Competition ,
    Date: 2007–02–06
  6. By: Márcio I. Nakane; Leonardo S. Alencar; Fabio Kanczuk
    Abstract: We use bank-level data to model the demand for bank services in Brazil following the discrete choice literature. A multinomial logit specification is used to study the demand for time deposits, for an aggregate of demand and passbook savings deposits, and for loans. Market for each of these products is defined at the municipality level. In the supply side, we find the absolute price-cost margins consistent with Bertrand competition and with cartel. Our results suggest that even Bertrand competition overestimates the degree of market power in the Brazilian banking industry.
    Date: 2006–06
  7. By: Calzolari, Giacomo; Scarpa, Carlo
    Abstract: We study the regulation of a utility firm which is active in a competitive unregulated sector as well. If the firm jointly operates its activities in the two markets, it enjoys economies of scope, whose size is the firm’s private information and is unknown to the regulator and the rival firms. We jointly characterize the unregulated market outcome (with price and quantity competition) and also optimal regulation. Accounting for the several effects of regulation on the unregulated market, we show the existence of an informational externality, in that regulation provides useful information to the rival firms. Although joint operation of multi-utility’s activities generates scope economies, it also brings about private information to the multi-utility, so that regulation is less efficient and also the unregulated market may be negatively affected. Nevertheless, we show that letting the multi-utility integrate productions is (socially) desirable, unless joint production is instead characterized by dis-economies of scope.
    Keywords: asymmetric information; competition; informational externality; multi-utility firms; regulation; scope economies
    JEL: L43 L51 L52
    Date: 2007–05
  8. By: David Gill; John Thanassoulis
    Abstract: In this paper we study how bargainers impact on markets in which firms set a list price to sell to those consumers who take prices as given. The list price acts as an outside option for the bargainers, so the higher the list price, the more the firms can extract from bargainers. We find that an increase in the proportion of consumers seeking to bargain can lower consumer surplus overall, even though new bargainers receive a lower price. The reason is that the list price for those who don`t bargain and the bargained prices for those who were already bargaining rise: sellers have a greater incentive to make the bargainers` outside option less attractive, at a cost to profits from non-bargainers. Competition Authority exhortations to bargain can therefore be misplaced. We also consider the implications for optimal seller bargaining.
    Keywords: Bargaining, Price Takers, List Price, Consumer Surpus
    JEL: L13 D43
    Date: 2007
  9. By: Sällström Matthews, S.E.
    Abstract: A very striking change in product selection over the last century has been the increased degree of specialisation of durable goods. To analyse these changes this paper introduces a new form of product differentiation called functional. It is shown that when a homogeneous population demands multiple locations (rather than consumers being heterogeneous) several standard results are reversed. A monopoly has an incentive to offer excessively specialised goods and delay innovation. It is in a duopoly that product characteristics will be efficient. Entry of a third firm will be more profitable in the fringes. Furthermore entry results in too much variety. Finally, the paper presents a novel argument in favour of bundling.
    Keywords: entry, innovation, optimum diversity, functional differentiation, bundling
    JEL: D42 D43 O31 L11
    Date: 2007–05
  10. By: María Fernanda Viecens
    Abstract: We study software platforms for which the total amount that users spend depends on the twosided pricing strategy of the platform firm, and on the pricing strategy of application developers. When setting prices, developers may be constrained by one of two margins: the demand margin and the competition margin. By analyzing how these margins affect pricing strategies we find some conditions which explain features of the market of operating systems and its differences with the one corresponding to the video consoles. The problem that arises when the platform does not set prices (as an open platform) is considered. We show that policy makers should promote open source in operating systems platforms but not necessarily in video consoles. We also analyze the incentives for a platform to integrate with applications as a function of the extent of substitutability among them and provide a possible explanation for the observed fact of vertical disintegration in these industries.
    Date: 2007–05
  11. By: Werner Kunz
    Abstract: This paper presents a method for visualizing competitive market structures based on scanner panel data where asymmetries are taken into account. For this, I combined consumer choice models based on mixed logit models with three-mode principal component analysis. This approach can be used to unfold a competitive market structure map. The methodology presented is able to quantify the clout and receptivity of various brands. The results can then be visualized over time. Using this approach, guidelines for promotional activities of new brands can be provided, and possible threats from the competition detected.
    Keywords: Three-mode PCA, elasticities, joint plots, market structure analysis.
    JEL: D49
    Date: 2007–05
  12. By: Sergio A. Lago Alves; Mirta N. S. Bugarin
    Abstract: This paper aims to contribute to the research agenda on the sources of price rigidity. Based on broadly accepted assumptions on the behavior of economic agents, we show that firms’ competition can lead to the adoption of sticky prices as a sub-game perfect equilibrium strategy to optimally deal with consumers’ risk aversion, even if firms have no adjustment costs. To this end, we build a model economy based on consumption centers with several complete markets and relax some traditional assumptions used in standard monetary policy models by assuming that households have imperfect information about the inefficient time-varying cost shocks faced by the .rms. Furthermore, we assume that the timing of events is such that, at every period, consumers have access to the actual prices prevailing in the market only after choosing a particular consumption center. Since such choices under uncertainty may decrease the expected utilities of risk-averse consumers, competitive firms adopt some degree of price stickiness in order to minimize the price uncertainty and "attract more customers".
    Date: 2006–11

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