nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒07‒07
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Introducing Competition and Deregulating the British Domestic Energy Markets: a Legal and Economic Discussion By Michael Harker; Catherine Waddams Price
  2. A new approach to measuring competition in the loan markets of the euro area By Michiel van Leuvensteijn; Jacob A. Bikker; Adrian A.R.J.M. van Rixtel; Christoffer Kok Sørensen
  3. Role of Non-Performing Loads (NPLs) and Capital Adequacy in Banking Structure and Competition By Yoonhee Tina Chang
  4. Privatization, Entry Regulation and the Decline of Labors Share of GDP: A Cross-Country Analysis of the Network Industries By Ghazala Azmat; Alan Manning; John Van Reenen
  5. Collusion via Resale By Garratt, Rod; Troger, Thomas; Zheng, Charles Zhoucheng
  6. Collusion and research joint ventures By Kaz Miyagiwa
  7. UK Merger Remedies under Scrutiny By Michael Harker
  8. To Abuse, or not to Abuse: Discrimination between Consumers By Pinar Akman
  9. Holdup and repeated interaction: the case of complementary monopoly By Kaz Miyagiwa
  10. Governance, Issuance Restrictions, And Competition In Payment Card Networks By Robert S. Pindyck
  11. Measuring Potential Gains from Mergers among Electricity Distribution Companies in Turkey using a Non-Parametric Model By Necmiddin Bagdadioglu; Catherine Waddams Price; Thomas Weyman-Jones
  12. Surcharging as a Facilitating Practice By Luke Garrod
  13. Exploration and Exploitation in Technology-based Alliance Networks By Duysters, Geert; Vanhaverbeke, Wim; Beerkens, Bonnie; Gilsing, Victor
  14. Industry Diversity and Its Impact on the Innovation Performance of Firms: An Empirical Analysis Based on Firm-level Panel Data By Martin Wörter
  15. Sub-federal administrative regulation of entry in Russia By Kolomak Evgeniya
  16. A Test of Perpetual R and D Races By Yves Breitmoser; Jonathan H. W. Tan; Daniel John Zizzo
  17. Interest Rate Clustering in UK Financial Services Markets By John K. Ashton; Robert Hudson

  1. By: Michael Harker (Centre for Competition Policy, University of East Anglia); Catherine Waddams Price (Centre for Competition Policy, University of East Anglia)
    Abstract: In this article we chart the development of competition and deregulation of the British retail energy markets, explaining the evolution of competitive constraints when consumers are introduced to supplier choice for the first time. In the context of rising real energy prices for consumers, and continued market power on the part of the incumbents, we address the question of whether the control of pricing practices through the ex post provisions of the general competition law is sufficient to protect consumers. We also explore the issue of whether reliance solely on these provisions is desirable given the uncertainty which surrounds the application of the Chapter II prohibition (governing abuse of dominance), specifically in respect of price discrimination in final markets. We conclude that the outcome of the liberalisation experiment in terms of delivering benefits for consumers is unclear.
    Keywords: Energy markets, deregulation, monopoly, competition, dominance, market power, consumer switching, switching behaviour, price rebalancing, ex post and ex ante regulation
    JEL: K21 K23 I38 L12 L41 L51 L94 L95
    Date: 2006–11
  2. By: Michiel van Leuvensteijn (Netherlands Bureau for Economic Policy Analysis (CPB), P.O. Box 80510, 2508 GM, The Hague, The Netherlands.); Jacob A. Bikker (De Nederlandsche Bank (DNB), Supervisory Policy Division, Strategy Department, P.O. Box 98, NL-1000 AB Amsterdam, The Netherlands.); Adrian A.R.J.M. van Rixtel (International Economics and International Relations Department, Banco de España (BdE), Alcalá 48, 28014 Madrid, Spain.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper is the first that applies a new measure of competition, the Boone indicator, to the banking industry. This approach is able to measure competition of bank market segments, such as the loan market, whereas many well-known measures of competition can consider the entire banking market only. A caveat of the Boone-indicator may be that it assumes that banks generally pass on at least part of their efficiency gains to their clients. Like most other model-based measures, this approach ignores differences in bank product quality and design, as well as the attractiveness of innovations. We measure competition on the lending markets in the five major EU countries as well as, for comparison, the UK, the US and Japan. Bearing the mentioned caveats in mind, our findings indicate that over the period 1994-2004 the US had the most competitive loan market, whereas overall loan markets in Germany and Spain were among the best competitive in the EU. The Netherlands occupied a more intermediate position, whereas in Italy competition declined significantly over time. The French, Japanese and UK loan markets were generally less competitive. Turning to competition among specific types of banks, commercial banks tend to be more competitive, particularly in Germany and the US, than savings and cooperative banks. JEL Classification: D4, G21, L1.
    Keywords: Banking industry, competition, loan markets, marginal costs, market shares.
    Date: 2007–06
  3. By: Yoonhee Tina Chang (School of Management, University of Bath)
    Abstract: This paper analyses the impact of the transition from price-cap regulation (deposit/loan rate control) to rate-of-return regulation (ROA, NP:s and/or BIS ratio) on banking industry structure. A simple theoretical model of banking competition suggests that the relative dominance of the two objective functions under different regulatory regimes affects the market structure. Imposing more stringent rate-of-return regulation, whilst relaxing price-cap regulation, reduces the equilibrium number of banks. The result from the theoretical model is also supported by empirical evidence from Korea, which has undergone substantial consolidation in recent years. The empirical analysis uses a unique data set of the entire commercial banking sector in Korea between 1976 and 2003, which covers both pre- and post-banking crisis periods.
    Keywords: Non-performing loans, capital adequacy, banking structure, regulation, competition
    JEL: G21 G28 L13 L59
    Date: 2006–09
  4. By: Ghazala Azmat; Alan Manning; John Van Reenen
    Abstract: Labor's share of GDP in most OECD countries has declined over the last two decades. Someauthors have suggested that these changes are linked to deregulation of product and labormarkets. To examine this we focus on a large quasi-experiment in the OECD: theprivatization of many network industries (e.g. telecommunications and utilities). We present amodel with agency problems, imperfect product market competition and worker bargainingwhich makes clear predictions on how the labor share, employment and wages respond toprivatization and other regulatory changes. We exploit cross-country panel data on severalnetwork industries and find that privatization can account for a significant proportion of thefall of labor's share (a fifth overall, but over half in Britain and France). The impact ofprivatization has been offset by falling barriers to entry, which consistent with theory,dampens profit margins.
    Keywords: Profit share, Wages, Privatization, Entry Regulation
    JEL: E25 E22 E24 L32 L33 J30
    Date: 2007–06
  5. By: Garratt, Rod; Troger, Thomas; Zheng, Charles Zhoucheng
    Abstract: The English auction is susceptible to tacit collusion when post-auction inter-bidder resale is allowed. We show this by constructing a continuum of equilibria where, with positive probability, one bidder wins the auction without any competition and divides the spoils by optimally reselling the good to the other bidders. Such equilibria support a collusive bidding pattern without requiring the colluders to make any commitment on bidding behavior or post-bidding spoil-division. The equilibria are valid for any number of asymmetric or symmetric bidders, arbitrary reserve prices, and various resale market rules. In symmetric environments, these equilibria interim Pareto dominate (among bidders) the standard value-bidding equilibrium.
    Keywords: auction, resale, collusion, English auction
    JEL: D4
    Date: 2007–06–30
  6. By: Kaz Miyagiwa
    Abstract: We examine whether cooperation in R&D leads to product market collusion. Suppose firms compete in a stochastic R&D race while maintaining the collusive equilibrium in a repeated-game framework. Innovation creates a cost asymmetry and destabilizes the collusive equilibrium. Firms forming an R&D joint venture can maintain cost symmetries through technology sharing agreement, thereby stabilizing collusion. The stability of post-discovery collusion makes collusion stable in pre-discovery periods. However, formation of R&D cooperatives may increase social welfare because firms share an efficient technology. Interestingly, a welfare improvement is less likely if innovation leads to a large cost reduction.
    Date: 2007–03
  7. By: Michael Harker (Centre for Competition Policy, University of East Anglia)
    Abstract: This paper focuses on the Somerfield decision of the Competition Appeal Tribunal (CAT). In that decision, the CAT demonstrated a high degree of deference to the Competition Commission where the latter was scoping divestiture remedies in a merger case. This approach is consistent with the case law of the US and the EC and, it is argued, is appropriate given the need for procedural expediency. The decision is placed in the wider context of the debates over the efficacy of merger remedies and the appropriate limits of judicial supervision of agency discretion in this area.
    Keywords: Merger remedies, divestiture, merger appraisal
    JEL: K21
    Date: 2006–10
  8. By: Pinar Akman (Centre for Competition Policy, University of East Anglia)
    Abstract: This paper questions whether discrimination between consumers by a dominant undertaking can and should constitute an abuse of a dominant position under Article 82EC. By finding that it can, the paper challenges the traditional interpretation of the discrimination ban under that provision, namely that discrimination constitutes abuse only when directed against the intermediate customers of the dominant undertaking. As such, the paper seeks to clarify the scope of Article 82EC as regards discrimination, and elaborate on whether discrimination between consumers should be abusive. This is done from both a law and an economics perspective, in order to put forward a proposal to ensure that competition law does not prohibit discrimination where economics finds it potentiall welfare enhancing.
    Keywords: Abuse of a dominant position, (price) discrimination, consumer welfare
    JEL: K21
    Date: 2006–11
  9. By: Kaz Miyagiwa
    Abstract: Suppose consumers buy complementary goods sequentially from several monopolists. If prices cannot be contracted on, there may be no sale in a one-shot game due to the holdup problem. Dynamic interaction of agents attenuates the problem. In equilibrium, the first and the last monopolist capture the entire monopoly profit while the other monopolists break even. Vertical integrations that exclude the last monopolist neither lower the price nor increase social welfare. On the other hand, partial integrations that include the last monopoly can reduce the combined profit and hence may never occur despite the welfare-improving potential.
    Date: 2007–02
  10. By: Robert S. Pindyck
    Abstract: I discuss the antitrust suit brought by the U.S. Department of Justice against Visa and MasterCard in 1998. Banks that issue Visa cards are free to also issue MasterCard cards, and vice versa, and many banks issue the cards of both networks. However, both Visa and MasterCard had rules prohibiting member banks from also issuing the cards of other networks, in particular American Express and Discover. In addition, most banks are members of both the Visa and MasterCard networks, so governance is to some extent shared. The DOJ claimed that restrictions on issuance and shared governance were anticompetitive and should be prohibited. Visa and MasterCard argued that these practices were procompetitive. The case raised important questions: Given that many banks issue both Visa and MasterCard, and that most merchants that accept one also accept the other, do the two networks really compete, and if so, how? And do Visa and/or MasterCard have market power, if so, in what market, and how is it exercised?
    JEL: G20 L40 L44
    Date: 2007–07
  11. By: Necmiddin Bagdadioglu (Department of Public Finance, Hacettepe University and Centre for Competition Policy, University of East Anglia); Catherine Waddams Price (Centre for Competition Policy, University of East Anglia); Thomas Weyman-Jones (Department of Economics, Loughborough University)
    Abstract: Turkish electricity reform is entering a new phase through the Turkish Government's proposal to create 21 new distribution companies, 18 of them through merger. Two aspects of merger analysis are the operational cost savings and the potential production efficiency gains. This paper concentrates on the second aspect and uses a recently developed methodology to assess the potential effect of these mergers and whether these mergers are efficiency enhancing. This is performed by comparing the actual efficiency levels of observed distribution companies with the merger of proposed aggregated companies. The model is calibrated on panel data from 1999 to 2003 which include measures of physical capital and labour inputs, as well as customer and energy related outputs. The results indicate potential for considerable efficiency gains from the proposed mergers.
    Keywords: Efficiency and productivity analysis, data envelopment analysis, electricity distribution
    JEL: G34 C14 L5 L94
    Date: 2006–09
  12. By: Luke Garrod (Centre for Competition Policy, University of East Anglia)
    Abstract: This paper shows how separately itemised surcharges potentially facilitate collussion during a temporary cost shock if firms commit to their duration. A duopoly model with price-matching punishments shows that if firms set higher prices they only receive punishment during the shock because they expect prices to fall in the future regardless of a deviation. When it is likely that costs will fall in the future, the price-matching punishment is too small to increase prices, so firms maintain rigid prices. When it is unlikely that costs will fall the punishment is harsh enough to sustain marginally higher supracompetitive prices. However, if firms commit to surcharges for the shock's duration they are able to set even higher prices, because surcharges effectively commit firms to a price decrease and so threaten a harsher punishment after the cost shock has ended.
    Keywords: Surcharge, facilitating practice, collusion
    JEL: L31 L41
    Date: 2006–10
  13. By: Duysters, Geert (UNU-MERIT); Vanhaverbeke, Wim (ECIS, Technical University Eindhoven); Beerkens, Bonnie (ECIS, Technical University Eindhoven); Gilsing, Victor (ECIS, Technical University Eindhoven)
    Abstract: Although the literature converges regarding the reasons why and how networks of technology alliances are formed, there is still lack of agreement on what constitutes an optimal network structure, once it has been formed. The aim of this paper is to fill this void and to determine what constitutes an optimal network structure for exploration and exploitation within the context of technological innovation. We differentiate among a firm's direct ties, indirect ties and degree of redundancy and analyze their role in the pharmaceutical, chemical and automotive industry. Regarding the role of direct ties, in combination with indirect ties, we find two alternative alliance network structures that are effective for both exploitation and exploration. We also find that redundancy in a firm's alliance network has a positive effect on exploitation. This is not the case for exploration, however, which seems to reveal a new insight into the role of redundancy when firms explore new technological fields. A final point is that our findings remain largely invariant across the three industries, enhancing the generalisability of our results.
    Keywords: Networks, Strategic Alliances, Innovation, Learning
    JEL: O32 O31 D85
    Date: 2007
  14. By: Martin Wörter (KOF Swiss Economic Institute, ETH Zurich)
    Abstract: This paper investigates empirically the impact of diversity on the innovation performance of a firm. We created a measure for diversity that mirrors differences in the resource base of firms within an industry and tested its impact on innovation in addition to more traditional factors like technology-push, demand-pull, and firm-size, based on panel data stemming from three representative cross sectional surveys carried out in the years 1996, 1999, and 2002 respectively. In fact, diversity has a significant positive impact on the innovation intensity of firms and thus supports more theoretical findings in this area. We also find empirical evidence for the technology push and the demand pull hypotheses as well as the importance of competition for innovation.
    Keywords: Diversity, Innovation Performance, Evolution of Industries, Jacobs Externalities, Panel data,
    JEL: O30
    Date: 2007–05
  15. By: Kolomak Evgeniya
    Abstract: The project assesses the sub-federal regulation of market entry around Russian regions by addressing two problems: what are the consequences of the regulation and what determines the variation of the market entry regulation among the regions. Assumptions of public interest regulation and public choice theories are tested. Empirical base of the project is the constructed data set, describing the administrative regulation of entry by start-up companies in Russian regions.
    JEL: K2 K4
    Date: 2007–05–10
  16. By: Yves Breitmoser (Institute of Microeconomics, European University Viadrina); Jonathan H. W. Tan (Institute of Microeconomics, European University Viadrina); Daniel John Zizzo (Centre for Competition Policy, University of East Anglia)
    Abstract: This paper presents an experimental study of dynamic indefinite horizon R and D races with uncertainty and multiple prizes. The theoretical predictions are highly sensitive: small parameter changes determine whether technological competition is sustained over time of converges into a market structure with an entrenched leadership and lower aggregate R and D research. The subjects' strategies are far less sensitive. In three out of four treatments (with the exception being a control treatment), the R and D races tend to converge to entrenched leadership. Investment is highest when rivals are close, and there is evidence of average over-investment.
    Keywords: R&D race, innovation, dynamics, experiment
    JEL: C72 C91 O31
    Date: 2006–07
  17. By: John K. Ashton (Centre for Competition Policy, University of East Anglia); Robert Hudson (Leeds University Business School)
    Abstract: In applications as diverse as banking, supermarket and catalogue sales, it has been clearly identified that prices have a strong propensity to cluster around certain digits. This study forwards an explanation and empirical investigation of price clustering in retail markets, through an examination of how interest rates cluster in two UK financial services markets. It is proposed that price or interest rate clustering forms in retail markets as firms wish to maximise returns from customers who have difficulties in recalling and processing price information. To compensate for limited recall, individuals use different behavioural strategies, such as rounding and truncating number information, which are recognised by firms when setting prices or interest rates. This theory is developed and tested using a dataset of retail interest rates from the UK which enables interest rate clustering to be viewed in both lending and investment markets, and at different levels of financial involvement. It is found that interest rate clustering occurs in a manner consistent with firms maximising returns from customers who have less ability in recalling and processing number information. Further, the degree of interest rate clustering observed is exaggerated for investors of smaller monetary quantities, for firms which profit maximise and at higher market rates of interest.
    Keywords: Interest rate setting, mortgages, deposits, limited recall
    JEL: E43 G21
    Date: 2006–10

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