nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒06‒18
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Infrastructure-Based Versus Service-Based : Competition In Telecommunications By KITTL, Jörg; LUNDBORG, Martin; RUHLE, Ernst-Olav
  2. Six Degrees of Separation : Operational Separation as a Remedy in European Telecommunications Regulation By CAVE, Martin
  3. Bundles and Range Strategies: The Case of Telecom Operators By PERNET, Sophie
  4. Triple Play Time By CRAMPES, Claude; HOLLANDER, Abraham
  5. Service Bundling and the Role of Access Charge in the Broadband Internet Service Market By SHIM, Sunghee; OH, Jungsuk
  6. An application proposal of yardstick competition for the regional markets of the French railway system By Julien Lévêque
  7. Vertical separation, disputes resolution and competition in railway industry By Dominique Bouf; Yves Crozet; Julien Lévêque
  8. The ratchet effect in a two lag setting and the mitigating influence of yardstick competition By Cord Brockmann
  9. Reciprocity, Inequity Aversion, and Oligopolistic Competition By Pinto, Luis Santos
  10. DRMs, Innovation and Creation By BOMSEL, Olivier; GEFFROY, Anne-Gaëlle
  11. Consumer Search and Information Intermediaries By Moez Bennouri; C. Robert Clark; Jacques Robert
  12. Monopoly pricing of social goods By Sääskilahti, Pekka
  13. Making Sense of the Experimental Evidence on Endogenous Timing in Duopoly Markets By Pinto, Luis Santos
  14. Techonology Based Strategic Alliances: A Turkish Perspective By Akkaya, Cenk
  15. Intellectual Property Rights and Crop-Improving R&D under Adaptive Destruction By Oleg Yerokhin; GianCarlo Moschini

  1. By: KITTL, Jörg; LUNDBORG, Martin; RUHLE, Ernst-Olav
    Abstract: Unbundling of the local loop (ULL) has seen quite different "success stories" in the various countries across Europe. Although the obligation for the provision of ULL was implemented in the regulatory framework early and mostly parallel to other means of liberalisation, national implementation has been rather heterogeneous. One question of decisive importance for national regulatory authorities (NRAs) was whether to foster service-based competition in the first phase of liberalisation or to focus on infrastructurebased competition. The different NRAs chose to head down different roads. This paper analyses whether the strategy of NRAs has had any mid-term effect on the economic welfare created in the communications markets. It indicates that infrastructure-based competition has a positive effect on innovation. Moreover, infrastructure-based competition appears to be more important for business customers than for residential clients. On the other hand, service-based competition lowers call prices and appears to be more important to residential markets. The results of this study point out the importance of a balanced approach to both types of policies.
    Keywords: competition; telecommunication; ladder of infrastructure; ladder of investement; regulatory policies.
    JEL: L51 L41 D43 L96 L43
    Date: 2006–12
  2. By: CAVE, Martin
    Abstract: Numerous proposals have been made for separation in the telecommunications sector, some of which have been implemented, including the break-up of the Bell system in the 1980s and the widespread implementation of accounting separation. In recent years, attention has been focussed on operational separation. This paper identifies the problem that this is intended to tackle, lists a number of possible variants and discusses experiences in the UK. Having specified the circumstances under which operational separation may be justified, it suggests how provisions for such separation could be made in European legislation.
    Keywords: telecomunications; regulation; operational separation.
    JEL: L51 L41 L96 L43
    Date: 2006–12
  3. By: PERNET, Sophie
    Abstract: Against a background of competition and the generalisation of IP that characterises the field of electronic communications, the concept of the "bundle" has resulted in the emergence of "triple play", and even "quadruple play." This paper offers an overview of the growth of this phenomenon by introducing a distinction between the basic components of multiplay strategies and the diverse range of functions that can be linked to these strategies.
    Keywords: Bundle; range strategy; triple play; quadruple play.
    JEL: O33 L86 L82 O14 L88 H41 K23 L90 L96
    Date: 2006–09
  4. By: CRAMPES, Claude; HOLLANDER, Abraham
    Abstract: Abstract: Digital convergence thrusts telephony, television and the internet into the socalled 'triple play' offerings, creating new forms of rivalry between cable operators and telephone companies. Markets participants feel compelled to enter new industries to survive, even though their core competencies are limited to their primary market. The outcome of triple play competition is likely to depend on the speed of the development of new technologies and the adaptation of the regulatory environment. In the short run, telephone companies will enjoy an advantage attributable to switching costs. However, this advantage will erode as younger subscribers switch to telephony on the internet.
    Keywords: triple play; bundling; digital convergence; broadband access; television and telephone
    JEL: O33 L86 L82 O14 L88 H41 K23 L96
    Date: 2006–09
  5. By: SHIM, Sunghee; OH, Jungsuk
    Abstract: Using the classical Hotelling model, this paper analyzes the incentive for a CATV service provider to bundle broadband internet services when entering the broadband internet services market. In addition, the effect of such service bundling by an entrant on the market incumbent with ownership over existing bottleneck facilities is analyzed. Furthermore, an access charge that maximizes social welfare is explored and determined. Two cases are considered: in the first case, the market is fully covered; and in the second case, the market is not fully covered. With full market coverage, an entrant has an incentive for service bundling if there is sufficient service differentiation. The entrant's bundling strategy reduces the incumbent's profit. In this case, the total social welfare is independent of the level of the access charge and only has an effect of redistributing the net surplus between consumers and the incumbent. With partial market coverage, the entrant has an incentive for service bundling at a low access charge. The incumbent's profit increases if the access charge is higher than the cost of access provisioning. In this case, the total social welfare is dependent on the level of access charge and the welfare maximizing access charge is less than the unit cost of providing access.
    Keywords: cable TV; broadband internet service; bundling; access charge; convergence.
    JEL: D45 L86 K21 L82 D42 K23 L96 L43
    Date: 2006–09
  6. By: Julien Lévêque (LET - Laboratoire d'économie des transports - [CNRS : UMR5593] - [Université Lumière - Lyon II] - [Ecole Nationale des Travaux Publics de l'Etat])
    Abstract: Inherited from the mid-20th century, the European organization of national railways in state-owned, integrated and few regulated monopolies is not relevant anymore. Although this has been an interesting answer to the problems of externalities, investments and regulation, changes have occurred in technology, demand and economical analysis. In particular, economists have proposed many regulation schemes, which lead the regulators to increase the efficiency of the firms operating on the market. Because of the high costs of rail transportation, governments decide to liberalize the market; in particular, the European Commission and the European Parliament wish the passenger rail market opening. However, some countries, like France, still have not opened their passenger rail market, which is currently monopolized by the historic and national operator, the SNCF. In this paper, we assume that for social, political and economical (economies of density, network externalities) reasons, the regional passenger traffic will remain operated by the SNCF, in the coming years. However, we propose a regulation framework, based on yardstick competition (comparisons of performances), which could encourage the SNCF to improve the efficiency of its regional trains. Yardstick competition consists in estimating what should be the best prices and subsidies, by comparing the performance of several similar and regulated firms, operating on several monopoly markets. If an operator seems to be relatively efficient according to comparisons, it has to be rewarded. On the other hand, an inefficient operator has to be punished, so that the comparison mechanism promotes competition. The paper aims at analysing the introduction of yardstick competition on the French market of regional rail transport operation. We show that the implementation of yardstick competition permits the local regulators to preserve the monopoly of the SNCF and to develop a virtual competition between its local activities. This leads to improve the efficiency of the regional operators and to increase the expertise of the rail regulators. In the first part of the paper, we discuss the implementation of yardstick competition on the French market of regional rail transport operation. First we describe what is called yardstick competition and how it could be implemented on this market. Then, we show that paradoxically to the preservation of the SNCF monopoly, the new market structure of the regional passenger rail transport (regionalized in 2002) is suitable for such an implementation of yardstick competition. In the second part, we examine some theoretical, economical models. On the one hand, we explain why the use of comparisons benefits to the rail regulators (reduction of its capture by the operator, reduction of uncertainty...). On the other hand, we review and discuss some limits of the mechanism (external heterogeneity of the compared operators, investment incentives, and collusion...). In the third part, we present the results of an econometric treatment, estimating the efficiency scores of the regional operators. First, we describe the cost-data base used, before resolving the question of external heterogeneity between the operators. It appears that the only explanatory variable of the external inefficiency is the delinquency rate: in some regions, the operator has to employ more ticket inspectors due to the delinquency. Then we explain the followed methodology and discuss the outcomes of the model. Operators' efficiency scores vary from 0.8 (for the worst) to 1 (for the best). Those internal inefficiencies may be due to sub-optimal spatial organization or employee rotations, the operation of rural trains with two agents although one is sufficient, informational rent or local strikes. Hence, we conclude that yardstick competition could be an original and efficient way of introducing “intramodal” competition in the regional passenger rail market.
    Keywords: Yardstick Competition ; Efficiency ; French Railway System ; Regional Markets
    Date: 2007–06–07
  7. By: Dominique Bouf (LET - Laboratoire d'économie des transports - [CNRS : UMR5593] - [Université Lumière - Lyon II] - [Ecole Nationale des Travaux Publics de l'Etat]); Yves Crozet (LET - Laboratoire d'économie des transports - [CNRS : UMR5593] - [Université Lumière - Lyon II] - [Ecole Nationale des Travaux Publics de l'Etat]); Julien Lévêque (LET - Laboratoire d'économie des transports - [CNRS : UMR5593] - [Université Lumière - Lyon II] - [Ecole Nationale des Travaux Publics de l'Etat])
    Abstract: There might be various aims for the vertical separation in railways such as the one instituted by the European Commission. One aim might be to improve efficiency, another one might be to introduce competition, as a mean, precisely to improve efficiency. Vertical separation creates, by itself, some disputes between the Infrastructure manager and the so called railways undertakings. So a dispute resolution system is necessary. First, this dispute resolution system is costly and thus might offset the efficiency benefits associated to the introduction of vertical separation. Second, this dispute resolution system can create a kind of collusive agreement where there is a quasi vertical re integration which does not favor competition. The paper is organized as follows : First the various kinds of disputes are analyzed. They are presented according to the following categories : - access to the track - slots allocation ; - timetable establishment ; - adjustments to the initial timetable ; - train circulation - delays - maintenance and renewal works - safety - estate - real estate sharing; - network minor changes - new lines Secondly, the methods by which those difficulties are dealt with are presented for two countries : UK and France. The British dispute resolution system relies heavily on cooperation and contracts within the railway industry whereas the French system is more hierarchy oriented, thus generating less conflicts but which are, maybe, more difficult to solve. But we can wonder whether the present British system, together with the Network Rail status doesn't lead to a more integrated railway industry trough long term co-operation. Conversely, the difficulties that the French railway industry is presently experiencing might lead to define a dispute resolution system more able to favor some forms of competition.
    Keywords: Railways ; Competition ; Vertical separation ; Dispute resolution
    Date: 2007–06–07
  8. By: Cord Brockmann (University of Augsburg, Department of Economics)
    Abstract: In order to increase efficiency in the provision of power distribution networks, the German regulator Bundesnetzagentur plans to implement revenue cap regulation together with yardstick competition. Revenue cap regulation could bear the ratchet effect: cost minimization need not to be optimal for the operator who anticipates that his revenue cap will become adjusted according to his cost performance. The regulator could extract all the rent by lowering an operator's revenue cap to the level of costs he revealed to be possible for him to reach. The ratchet effect could be mitigated by yardstick competition at which the level of revenues that is allowed to one operator is tied to the performance of others that are comparable to him. One will only be allowed to accumulate revenues that recover the least cost level that has been adopted within the group of comparable decision makers. In a setting of two sequential regulatory lags, this paper examines the occurence of the ratchet effect and the mitigating influence that yardstick competition has on it.
    Keywords: ratchet effect, yardstick competition, regulation
    JEL: L51
    Date: 2007–06
  9. By: Pinto, Luis Santos
    Abstract: This paper studies how reciprocity and inequity aversion influence the behavior of firms in imperfectly competitive markets. The paper shows that if reciprocal firms compete à la Cournot, then they are able to sustain “collusive” outcomes under a positive reciprocity equilibrium. By contrast, Stackelberg warfare outcomes may emerge under a negative reciprocity equilibrium. The results for inequity aversion are similar. Cournot competition between inequity averse firms can be harmful to consumers if it leads to equilibria where firms feel compassion toward each other. However, in equilibria where inequity averse firms are envious of each other consumers are better off than if firms were selfish. The paper also shows that only under very restrictive conditions does reciprocity or inequity aversion have an impact on Bertrand competition. Finally, the paper shows that non-selfish preferences have a greater impact on equilibrium outcomes in markets with a small number of firms.
    Date: 2007
  10. By: BOMSEL, Olivier; GEFFROY, Anne-Gaëlle
    Abstract: DRMs are intellectual property institutions. They transpose the empirical principle of copyright, which implicitly recognizes that specific ownership rules should be attached to non scientific creation, into the digital era. The legal protection of DRMs, a private means of enforcing content excludability, participates in the "privatization" of copyright protection. This, in turn, means that a proprietary software — governed by intellectual property rights, reinforced by public law — becomes the key to the vertical relations shaped by exclusive copyright. DRMs consequently represent a major stake in the competition to capture network effects in the content distribution vertical chain
    Keywords: copyright; distribution; DRMs; network effects
    JEL: D43 D62 L96 K21
    Date: 2006–06
  11. By: Moez Bennouri (Service de l’enseignement de la finance, HEC Montréal); C. Robert Clark (IEA, HEC Montréal); Jacques Robert (TI, HEC Montréal)
    Abstract: In this paper we model the market for a homogeneous good and examine the role of information in determining market outcomes. Unlike in Baye and Morgan (2001) where consumers can only learn about the prices charged by different firms by subscribing to an information intermediary’s service, we allow consumers to shop for price quotes. We are interested in determing the impact on market outcomes of allowing for this additional means of information acquisition. Relative to the case where consumers have no interest in searching for prices, consumers become no better off as the cost of search falls. The intermediary, in an effort to compensate for the loss of revenue that it might have earned from consumers, increases the fees that it charges to firms for the right to advertise their product through it. As a result, fewer firms advertise in equilibrium, and so, those that do post higher prices, and, in expectation, consumers pay more for the product. The price increase appropriates all of the gains in consumer surplus generated by the decrease in the cost of search.
    Keywords: Search, advertising, information intermediary, price dispersion
    Date: 2007–01
  12. By: Sääskilahti, Pekka
    Abstract: We analyse the roles of social network topology and size on the monopoly pricing of network goods in a market, where consumers interact with each other and are characterised by their social relations. The size effect is the well-known network externalities phenomenon, while the topological effect has not been previously studied in this context. The topological effect works against, and dominates, the size effect in monopoly pricing by reducing the monopoly's capacity to extract consumer surplus. Under asymmetric information about consumer types, the monopoly prefers symmetric network topologies, but the social optimum is an asymmetric network.
    Keywords: social relations; networks; coordination; monopoly
    JEL: L14 D42 D82
    Date: 2007
  13. By: Pinto, Luis Santos
    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 Saloner’s (1987) and Hamilton and Slutsky’s (1990) endogenous timing games by assuming that players are averse to inequality in payoffs. We explore the theoretical implications of inequity aversion and compare them to the empirical evidence. We 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.
    Date: 2007
  14. By: Akkaya, Cenk
    Abstract: Strategic alliances can be as simple as two companies sharing their technological and/or marketing resources. In this context, strategic alliances help firms in an entrepreneurial way by allowing them to reorganize their value chain activities more effectively. Business alliances can assist organizations to acquire the means to compete within an ever complex and changing environment and it provide firms with market knowledge, open up access to know-how and technology. This study focuses on the technology related alliances from 2002 to 2005 in Turkey.
    Keywords: Strategic Alliances; Techology Based Alliances; Compatitive Power
    JEL: O32 O3
    Date: 2007
  15. By: Oleg Yerokhin; GianCarlo Moschini (Center for Agricultural and Rural Development (CARD))
    Abstract: This paper studies how the strength of intellectual property rights (IPRs) affects investments in biological innovations when the value of an innovation is stochastically reduced to zero because of the evolution of pest resistance. We frame the problem as a research and development (R&D) investment game in a duopoly model of sequential innovation. We characterize the incentives to invest in R&D under two competing IPR regimes, which differ in their treatment of the follow-on innovations that become necessary because of pest adaptation. Depending on the magnitude of the R&D cost, ex ante firms might prefer an intellectual property regime with or without a "research exemption" provision. The study of the welfare function that also accounts for benefit spillovers to consumers—which is possible analytically under some parametric conditions, and numerically otherwise—shows that the ranking of the two IPR regimes depends critically on the extent of the R&D cost.
    Keywords: biological resistance, intellectual property rights, Markov perfect equilibrium, patents, research exemption, R&D, sequential innovation. JEL Classification: L00, O31, O34, Q28
    Date: 2007–06

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