nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒06‒11
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. Dynamic Price Competition with Network Effects By Luís Cabral
  3. Exclusionary contracts, entry, and communication By Gerlach, Heiko
  4. Bertrand-Edgeworth equilibrium with a large number of firms By Roy Chowdhury, Prabal
  5. Minimum Safety Standard, Consumers' Information, and Competition, The By Stephan Marette
  6. Incentives for Process Innovation in a Collusive Duopoly By Christoph Engel
  7. Innovation and Market Structure in Presence of Spillover Effects By Khazabi, Massoud
  8. Cartel Damages Claims and the Passing-on Defence By Van Dijk, Theon; Verboven, Frank
  9. Mixed Oligopoly under Demand Uncertainty By Anam, Mahmudul; Basher, Syed A.; Chiang, Shin-Hwan
  10. Industry characteristics and anti-competitive behavior: Evidence from the EU By Gual, Jordi; Mas, Nuria
  11. Understanding the M&A boom in Japan: What drives Japanese M&A? By ARIKAWA Yasuhiro; MIYAJIMA Hideaki
  12. ATM SURCHARGES: EFFECTS ON DEPLOYMENT AND WELFARE By Ramón Faulí-Oller; Ioana Chioveanu; Joel Sandonís; Juana Santamaria-Garcia
  13. Bank Consolidation and Soft Information Acquisition in Small Business Lending By OGURA Yoshiaki; UCHIDA Hirofumi
  14. Lending Competition, Relationship Banking, and Credit Availability for Entrepreneurs By OGURA Yoshiaki
  15. The reaction by industry insiders to M&As in the European financial industry By Campa, Jose M.; Hernando, Ignacio
  16. Has the EU’s Single Market Programme fostered competition? Testing for a decrease in markup ratios in EU industries By Harald Badinger
  17. Intellectual Property Rights, Parallel Imports and Strategic Behavior By Maskus, Keith E.; Ganslandt, Mattias
  18. Information Sales and Strategic Trading By Diego Garcia; Francesco Sangiorgi
  19. Economic Experiments and Neutrality in Internet Access By Shane Greenstein
  20. Technological Innovation in the Airline Industry: The Impact of Regional Jets By Jan K. Brueckner; Vivek Pai
  21. Competing in Organizations: Firm Heterogeneity and International Trade By Marin, Dalia; Verdier, Thierry

  1. By: Luís Cabral (New York University)
    Abstract: I consider a dynamic model of competition between two proprietary networks. Consumers die with a constant hazard rate and are replaced by new consumers. Firms compete for new consumers to join their network by offering network entry prices (which may be below cost). New consumers have a privately known preference for each network. Upon joining a network, in each period consumers enjoy a benefit which is increasing in network size during that period. Firms receive revenues from new consumers as well as from consumers already belonging to their network. I discuss various properties of the equilibrium, including the pricing function, the system’s expected motion, and the stationary distribution of market shares. I derive several results analytically. I then confirm and extend these results by numerical computation. Finally, I use the model to estimate the barrier to entry create by network effects.
    Date: 2007–04
  2. By: Ramón Faulí-Oller (Universidad de Alicante); Marc Escrihuela (Universidad de Alicante)
    Abstract: It is well known that the profitability of horizontal mergers with quantity competition is scarce. However, in an asymmetric Stackelberg market we obtain that some mergers are profitable. Our main result is that mergers among followers become profitable when the followers are inefficient enough. In this case, leaders reduce their output when followers merge and this reduction renders the merger profitable. This merger increases price and welfare is reduced.
    Keywords: Mergers; Asymmetries; Stackelberg.
    JEL: L13 L40 L41
    Date: 2007–05
  3. By: Gerlach, Heiko (University of Auckland)
    Abstract: I examine the incentives of firms to communicate entry into an industry where the incumbent writes exclusionary, long-term contracts with consumers. The entrant's information provision affects the optimal contract proposal by the incumbent and leads to communication incentives that are highly non-linear in the size of the innovation. Entry with small and medium-to-large innovations is announced whereas small-to-medium and large innovations are not communicated. It is demonstrated that this equilibrium communication behavior maximizes ex ante total welfare by reducing the anti-competitive impact of excessively exclusive contracts. By contrast, consumers always prefer more communication and the incumbent's equilibrium contract maximizes ex ante consumer surplus.
    Keywords: Long-term contracts; communication; contractual switching costs; exclusionary conduct;
    JEL: D86 L12 L41
    Date: 2007–05–15
  4. By: Roy Chowdhury, Prabal
    Abstract: We examine a model of price competition with strictly convex costs where the firms simultaneously decide on both price and quantity, are free to supply less than the quantity demanded, and there is discrete pricing. If firms are symmetric then, for a large class of residual demand functions, there is a unique equilibrium in pure strategies whenever, for a fixed grid size, the number of firms is sufficiently large. Moreover, this equilibrium price is within a grid-unit of the competitive price. The results go through to a large extent when the firms are asymmetric, or they are symmetric but play a two stage game and the tie-breaking rule is `weakly manipulable'.
    Keywords: Bertrand equilibrium; Edgeworth paradox; tie-breaking rule; rationing rule; folk theorem of perfect competition.
    JEL: D41 D43 L13
    Date: 2007–04
  5. By: Stephan Marette (Center for Agricultural and Rural Development (CARD); Food and Agricultural Policy Research Institute (FAPRI))
    Abstract: This paper explores the effects of a standard influencing care choice. Firm(s) may increase the probability of offering safe products by incurring a cost. Under duopoly, they compete either in prices or in quantities. Under perfect information about safety for consumers, the selected standard that corrects a safety underinvestment is always compatible with competition. Safety overinvestment only emerges under competition in quantities and relatively low values of the cost. Under imperfect information about safety for consumers, the standard leads to a monopoly situation. However, for relatively large values of the cost, a standard cannot impede the market failure coming from the lack of information.
    Keywords: information, market structure, safety, standard. JEL Classification: C L1, L5
    Date: 2007–02
  6. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Two suppliers of a homogenous good know that, in the second period, they will be able to collude. Gains from collusion are split according to the Nash bargaining solution. In the first period, either of them is able to invest into process innovation. Innovation changes the status quo pay-off, and thereby affects the distribution of the gains from collusion. The resulting innovation incentive is strictly smaller than in the competitive case.
    Keywords: Duopoly, Collusion, Innovation Incentives
    JEL: D43 K21 L13 O31
    Date: 2007–05
  7. By: Khazabi, Massoud
    Abstract: The paper proposes a theory of innovation and market structure. The model incorporates n firms with horizontal spillovers all interacting within a hypothetical industry. In a two-stage sequential game framework, four types of cooperation are studied: full non-cooperation; cooperation in both stages; cooperation only in the R&D stage; and simultaneous cooperation and non-cooperation in the R&D stage. It is shown that the effect of competition on total innovation investment varies among all four cases and mostly depends on the level of spillover.
    Keywords: R&D; Innovation; competition; cooperation; spillover; market structure
    JEL: L1
    Date: 2007
  8. By: Van Dijk, Theon; Verboven, Frank
    Abstract: We develop a general economic framework for computing cartel damages claims by purchaser plaintiffs. We decompose the lost profits from the cartel in three parts: the direct cost effect (or anticompetitive price overcharge), the pass-on effect and the usually neglected output effect. The pass-on effect is the extent to which the plaintiff passes on the price overcharge by raising its own price, and the output effect is the lost business resulting from this passing-on. We subsequently introduce various models of imperfect competition for the plaintiff's industry. This enables us to evaluate the relative importance of the cost, pass-on and output effects. We show that an adjusted passing-on defence (i.e. accounting for the output effect) is justified under a wide variety of circumstances, provided that sufficiently many firms in the plaintiff's market are affected by the cartel. We derive exact discounts to the direct cost effect, which depend on relatively easy-to-observe variables, such as the pass-on rate, the number of firms, the number of firms affected by the cartel, and/or the market shares. We finally extend our framework to assess the cartel's total harm, further demonstrating the crucial importance of the output effect. Our results are particularly relevant in light of the recent developments by U.S. and European antitrust authorities to make cartel damages claims more in line with actually lost profits.
    Keywords: cartels; damages; passing-on defence
    JEL: L40
    Date: 2007–06
  9. By: Anam, Mahmudul; Basher, Syed A.; Chiang, Shin-Hwan
    Abstract: In this paper we introduce product demand uncertainty in a mixed oligopoly model and reexamine the nature of sub-game perfect Nash equilibrium (SPNE) when firms decide in the first stage whether to lead or follow in the subsequent quantity-setting game. In the non-stochastic setting, Pal (1998) demonstrated that when the public firm competes with a domestic private firm, multiple equilibria exist but the efficient equilibrium outcome is for the public firm to follow. Matsumura (2003a) proved that when the public firm's rival is a foreign private firm, leadership of the public firm is both efficient as well as SPN equilibrium. Our stochastic model shows that when the leader must commit to output before the resolution of uncertainty, multiple SPNE is possible. Whether the equilibrium outcome is public or private leadership hinges upon the degree of privatization and market volatility. More importantly, Pareto-inefficient simultaneous production is a likely SPNE. Our results are driven by the fact that the resolution of uncertainty enhances the profits of the follower firm in a manner that is well known in real option theory.
    Keywords: Mixed oligopoly; Partial privatization; Demand Uncertainty.
    JEL: L13 D8 C72
    Date: 2007–06–08
  10. By: Gual, Jordi (IESE Business School); Mas, Nuria (IESE Business School)
    Abstract: In the EU, competition policy is based on three main pillars: antitrust, merger control and monitoring state aid. Our analysis focuses on antitrust policy. In this context, the Commission is concerned about restrictive agreements and practices that imply an abuse of market power. The objective of this paper is to analyze what are the main criteria used by the Commission when deciding on anti-competitive practices. In particular, our goal is to determine whether and to what extent the Commission takes into account economic analysis when deciding whether anti-competitive behavior has taken place. There is a very extensive industrial organization literature which provides the theoretical and empirical background that associates industry features with the likelihood of practices that restrict competition. However, the literature evaluating the competition authority's decisions is much scarcer and has focused mainly on the analysis of merger policy. Our paper contributes to fill this gap in the literature. We examine almost 2,000 cases submitted to the Commission for consideration from January 1999 to February 2004 with the aim of determining which industry characteristics led the Commission to decide against an investigated firm on antitrust grounds.
    Keywords: Competition policy; Antitrust; European Commission; Mergers;
    Date: 2007–03–09
  11. By: ARIKAWA Yasuhiro; MIYAJIMA Hideaki
    Abstract: In this paper, we examine the causes of the first merger boom since the late 1990s in Japan. Using industry-level data, we show that mergers and acquisitions (M&As) are driven mainly by economic shocks. While industries with higher growth opportunities are likely to have more M&A activity, industries facing negative fundamental shocks, such as rapid sales declines, also experience larger M&A deals. These results suggest that the recent merger wave in Japan is mainly explained by the neoclassical model. At the firm level, we find that the bidder is the firm with the higher growth opportunity, and the target is the one with the lower growth opportunity. This means that Japanese firms improved their efficiency through merger activity since the 1990s. Lastly, we find that internal funds for the acquiring firm play a very important role in bidding activity, while a high probability of being targeted for M&A is associated with high leverage.
    Date: 2007–06
  12. By: Ramón Faulí-Oller (Universidad de Alicante); Ioana Chioveanu (Universidad de Alicante); Joel Sandonís (Universidad de Alicante); Juana Santamaria-Garcia (Universidad de Alicante)
    Abstract: This paper analyzes the effects of ATM surcharges on deployment and welfare, in a model where banks compete for ATM and banking services. Foreign fees, surcharges and the interchange fee are endogenously determined. We find that, when the interchange fee is cooperatively fixed by banks to maximize joint profits, surcharges should be allowed, as they neutralize the collusive effect of the interchange fee. As a consequence, ATM deployment is higher and retail prices lower than without surcharges, increasing consumer surplus and social welfare.
    Keywords: ATM, surcharge, foreign fee, interchange fee, collusion
    JEL: L1 G2
    Date: 2007–05
  13. By: OGURA Yoshiaki; UCHIDA Hirofumi
    Abstract: We empirically examine the impact of bank consolidation on bankers' acquisition of soft information about borrowers. Using a dataset of small businesses, we found that bank mergers have a negative impact on soft information acquisition by small banks while those by large banks that have less interest in acquiring soft information irrespective of mergers have no impact. Detailed analyses of the post-merger organizational restructuring show that the measures of an increase in organizational complexity have a negative and significant impact on soft information acquisition by small banks, while the measures of cost-cut do not have any significant impact on soft information acquisition. This result implies that the increase in organizational complexity by bank mergers hindered soft information acquisition, which is consistent with Stein's prediction [2002, J. Fin.] on the comparative advantage of simple and flat organizations in acquiring and processing soft information.
    Date: 2007–06
  14. By: OGURA Yoshiaki
    Abstract: Existing theories consistently predict that relationship banking enhances credit availability for new firms. To put more concretely, these theories predict that soft information acquisition about borrowers' creditworthiness and the resulting incumbent lender's profit-improving and relation-specific consulting ability yield a monopolistic rent for the incumbent lender, and that this expected rent encourages a bank to lend to younger firms to pre-empt an exclusive relationship ahead of rival banks. The present study tries to provide evidence for this hypothesis using a dataset collected from the 2003 Survey of the Financial Environment of Enterprises in Japan. Our statistical analysis shows that the time interval from start-up to the first loan approval for a firm is shorter if a bank intends to undertake relationship banking, even after controlling fund-demand and creditworthiness factors of each firm. This result provides evidence to support the above hypothesis. Our logit analysis shows that the probability for banks to undertake relationship banking is decreasing or hump-shaped against the number of competing banks. Thus, the increase in the number of competing banks is more likely to discourage these banks from providing relationship banking, and this in turn diminishes credit availability for new firms. Besides such an effect arising from relationship banking, the data shows evidence suggesting the statistical significance of another mechanism generating a negative correlation between the number of competing banks and credit availability for new firms, which may be explained by the theory of winner's curse. As a whole, credit availability for new firms was higher in more concentrated local credit markets in the last fifteen years in Japan.
    Date: 2007–06
  15. By: Campa, Jose M. (IESE Business School); Hernando, Ignacio (Bank of Spain)
    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: 2007–04–07
  16. By: Harald Badinger (Europainstitut/Department of Economics, Wirtschaftsuniversität Wien)
    Abstract: We use a panel approach, covering 10 EU Member States over the period 1981 to 1999, for each of three major industry groups (manufacturing, construction, and services) and 18 more detailed industries to test whether the EU’s Single Market Programme has led to a reduction in firms’ markups over marginal costs. We address explicitly the uncertainty with respect to the timing of the changeover and allow for a possibly continuous regime shift in a smooth transition analysis. Where regime shifts can be found, the velocity of transition is extremely high, making the linear model a justifiable approximation. We also test for discrete structural breaks in the time window from 1988 to 1996, taking up endogeneity concerns in a GMM framework. Markup reductions are found for aggregate manufacturing (though it is also suggested that markups increased in some manufacturing industries in the pre-completion period at the end of the 1980s) and – less robustly – for construction. In contrast, markups have gone up in most service industries since the early 90s, which confirms the weak state of the Single Market for services and suggests that anti-competitive defense strategies have emerged in the 1990s in service industries.
    Keywords: EU, markup, Single Market
    JEL: L11 F15
    Date: 2007–08–05
  17. By: Maskus, Keith E. (Department of Economics); Ganslandt, Mattias (Research Institute of Industrial Economics (IFN))
    Abstract: The existence of parallel imports (PI) raises a number of interesting policy and strategic questions, which are the subject of this survey article. For example, parallel trade is essentially arbitrage within policy-integrated markets of IPR-protected goods, which may have different prices across countries. Thus, we analyze fully two types of price differences that give rise to such arbitrage. First is simple retail-level trade in horizontal markets because consumer prices may differ. Second is the deeper, and more strategic, issue of vertical pricing within the common distribution organization of an original manufacturer selling its goods through wholesale distributors in different markets. This vertical price control problem presents the IPR-holding firm a menu of strategic choices regarding how to compete with PI. Another strategic question is how the existence of PI might affect incentives of IPR holders to invest in research and development (R&D). The global research-based pharmaceutical firms, for example, strongly oppose any relaxation of restrictions against PI of drugs into the United States, arguing that the potential reduction in profits would diminish their ability to innovate. There is a close linkage here with price controls for medicines, which are a key component of national health policies but can give rise to arbitrage through PI. We also discuss the complex economic relationships between PI and other forms of competition policy, or attempts to limit the abuse of market power offered by patents and copyrights. Finally, we review the emerging literature on how policies governing PI may affect international trade agreements.
    Keywords: IPR; Parallel Imports; International Arbitrage; Research and Development
    JEL: F15 K21 L14
    Date: 2007–03–12
  18. By: Diego Garcia; Francesco Sangiorgi
    Abstract: We study information sales in financial markets with strategic risk-averse traders. Our main result establishes that the optimal selling mechanism is one of the following two: (i) sell to as many agents as possible very imprecise information; (ii) sell to a single agent a signal as precise as possible. As noise trading per unit of risk-tolerance becomes large, the newsletters or rumors associated with (i) dominate the exclusivity contract in (ii). The optimal information sales contracts share similar properties in market-orders and limit-orders markets, while models in which competitive behavior is assumed yield qualitatively different equilibria. The endogeneity of the information allocation implies a ranking reversal of the informational efficiency of prices across markets and models. Equilibrium prices become more informative in market-orders than in limit-orders markets, and the model with imperfect competition yields more informative prices than its competitive counterpart. These results are driven by the seller of information offering more precise signals when the externality in the valuation of information is relatively less intense.
    Keywords: markets for information, imperfect competition, share auctions.
    JEL: D82 G14
    Date: 2007
  19. By: Shane Greenstein
    Abstract: Economic experiments yield lessons to firms that can be acquired only through market experience. Economic experiments cannot take place in a laboratory; scientists, engineers, or marketing executives cannot distill equivalent lessons from simply building a prototype or interviewing potential customers and vendors. The historical record illustrates that economic experiments were important for value creation in Internet access markets. In general, industry-wide returns from economic experiments exceed private returns, with several important exceptions. Those conclusions motivate an inquiry into whether regulatory policy can play a role in fostering the creation of value. The net neutrality debate is reinterpreted through this lens. A three part test is proposed for encouraging economic experiments from both broadband carriers and providers of complementary services.
    JEL: L5 L86 L96 O31
    Date: 2007–06
  20. By: Jan K. Brueckner (Department of Economics, University of California-Irvine); Vivek Pai (Department of Economics, University of California-Irvine)
    Abstract: This paper explores the impact of the regional jet (RJ), an important new technological innovation in the airline industry, on service patterns and service quality. The evidence shows that RJs were used to provide service on a large number of new hub-and-spoke (HS) and point-to-point (PP) routes. In addition, they replaced discontinued jet and turboprop service on many HS routes, as well as supplementing continuing jet service on such routes. When replacement or supplementation by RJs occurred, passengers benefited from better service quality via higher flight frequencies. The paper's theoretical analysis predicts that the frequency advantage of RJs over jets, a consequence of their small size, should have led to the emergence of PP service in thin markets where such service was previously uneconomical. However, the evidence contradicts this prediction, showing that markets attracting new PP service by RJs had demographic characteristics similar to those of markets that already had jet PP service or attracted it after 1996.
    Keywords: Regional jet; Airlines; Network
    JEL: L93
    Date: 2007–02
  21. By: Marin, Dalia; Verdier, Thierry
    Abstract: This paper develops a theory which investigates how firms’ choice of corporate organization is affecting firm performance and the nature of competition in international markets. We develop a model in which firms’ organisational choices determine heterogeneity across firms in size and productivity in the same industry. We then incorporate these organisational choices in a Krugman cum Melitz and Ottaviano model of international trade. We show that the toughness of competition in a market depends on who - headquarters or middle managers - have power in firms. Furthermore, we propose two new margins of trade adjustments: the monitoring margin and the organizational margin. International trade may or may not lead to an increase in aggregate productivity of an industry depending on which of these margins dominate. Trade may trigger firms to opt for organizations which encourage the creation of new ideas and which are less well adapt to price and cost competition.
    Keywords: international trade with endogenous firm organizations and endogenous toughness of competition; firm heterogeneity; power struggle in the firm
    JEL: F12 F14 L22 D23
    Date: 2007–05

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