nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒07‒13
fourteen papers chosen by
Russell Pittman
US Department of Justice

  1. “Net Neutrality,” Non-Discrimination and Digital Distribution of Content Through the Internet By Nicholas Economides;
  2. Tacit Collusion, Firm Asymmetries and Numbers: Evidence from EC Merger Cases By Stephen Davies; Matthew Olczak; Heather Coles
  3. Bargaining over Remedies in Merger Regulation By Bruce Lyons; Andrei Medvedev
  4. Efficiency and Price Effects of Horizontal Bank Mergers By John K. Ashton; Khac Pham
  5. When are Auctions Best? By Jeremy Bulow; Paul Klemperer
  6. Exclusionary Discounts By Janusz Ordover; Greg Shaffer
  7. Searching for the Long-Lost Soul of Article 82EC By Pinar Akman
  8. Do Consumers Switch to the Best Supplier? By Chris Wilson; Catherine Waddams Price
  9. The Impact of Uncertain Intellectual Property Rights on the Market For Ideas: Evidence From Patent Grant Delays By Joshua S. Gans; David H. Hsu; Scott Stern
  10. Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development By Sharon Novak; Scott Stern
  11. Convergence in Finite Cournot Oligopoly with Social and Individual Learning By Thomas VALLEE (LEN - IAE Nantes); Murat YILDIZOGLU (GREThA)
  12. Survey of Public Attitudes to Price-Fixing and Cartel Enforcement in Britain By Andreas Stephan
  13. The Regulatory Perception of the Marketing Function: an Interpretation of UK Competition Authority Investigations 1950-2005 By John K. Ashton; Andrew Pressey
  14. Practice Makes Perfect: On Professional Standards By Sällström, Susanna

  1. By: Nicholas Economides (Stern School of Business, New York University);
    Abstract: The vast majority of US residential consumers face a monopoly or duopoly in broadband Internet access. Up to now, the Internet was characterized by a regime of “net neutrality” where there was no discrimination in the price of a transmitted information packet based on the identities of either the transmitter or the receiver or based on the application or type of content that it contained. The providers of DSL or cable modem access in the United States, taking advantage of a recent regulatory change that effectively abolished net neutrality and non-discrimination protections, and possessing significant market power, have recently discussed implementing a variety of discriminatory pricing schemes. This paper discusses and evaluates the implication of a number of these schemes on prices, profits of the network access providers and those of the complementary applications and content providers, as well as the impact on consumers. We also discuss an assortment of anti-competitive effects of such price discrimination, and evaluate the possibility of imposition of net neutrality by law.
    Keywords: net neutrality, Internet, price discrimination, vertical restrictions, two-sided pricing, horizontal cooperation, raising rivals’ costs
    JEL: L1 D4 L12 L13 C63 D42 D43
    Date: 2007–03
  2. By: Stephen Davies (Centre for Competition Policy, University of East Anglia); Matthew Olczak (Centre for Competition Policy, University of East Anglia); Heather Coles
    Abstract: The purpose of this paper is to identify empirically the implicit structural model, especially the roles of size asymmetries and concentration, used by the European Commission to identify mergers with coordinated effects (i.e. collective dominance). Apart from its obvious policy-relevance, the paper is designed to shed empirical light on the condition under which tacit collusion is most likely. We construct a database relating to 62 candidate mergers and find that, in the eyes of the Commission, tacit collusion in this context virtually never involves more than two firms and requires close symmetry in the market shares of the two firms.
    Keywords: Tacit collusion, collective dominance, coordinated effects, European mergers, asymmetries
    JEL: L13 L41
    Date: 2007–03
  3. By: Bruce Lyons (Centre for Competition Policy, University of East Anglia); Andrei Medvedev (Centre for Competition Policy, University of East Anglia)
    Abstract: This paper provides a first attempt to understand how outcomes are determined by the standard institutions of merger control. In particular, we focus on the internationally standard 2-phase investigation structure and remedy negotiations of the form practiced by the EC. We find that there are inherent biases in remedy outcomes, and identifiable circumstances where offers will be excessive and where they will be deficient. In particular, we find clear circumstances in which firms offer excessive remedies, which goes against a possible intuition that firms should expect to extract an information rent for possessing superior information about competition in the market.
    Keywords: Merger regulation, merger remedies, competition policy, bargaining
    JEL: K21 L41 L51
    Date: 2007–02
  4. By: John K. Ashton (Centre for Competition Policy, University of East Anglia); Khac Pham (Centre for Competition Policy, University of East Anglia)
    Abstract: This study provides an empirical assessment of the efficiency and interest rate changes occurring during 61 UK retail bank mergers. Key findings of the work include the general efficiency enhancing influence of UK bank mergers and the limited effect of merger on retail interest rates. Furthermore, different banking products appear to be influenced differently by mergers. It is proposed that future assessments of bank competition and mergers require an accommodation of different types of bank customer.
    Keywords: Retail banking, mergers, efficiency and price effects
    JEL: G14 G21
    Date: 2007–06
  5. By: Jeremy Bulow (Stanford University); Paul Klemperer (Nuffield College, Oxford University)
    Abstract: We compare the two most common bidding processes for selling a company or other asset when participation is costly to buyers. In an auction all entry decisions are made prior to any bidding. In a sequential bidding process earlier entrants can make bids before later entrants choose whether to compete. The sequential process is more efficient because entrants base their decisions on superior information. But pre-emptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry in several ways it usually generates higher expected revenue.
    Keywords: auctions, jump bidding, sequential sales, procurement, entry.
    JEL: D44 G34 L13
    Date: 2007–07–09
  6. By: Janusz Ordover (New York University and Competition Policy Associates); Greg Shaffer (Simon School of Business, University of Rochester)
    Abstract: We consider a two-period model with two sellers and one buyer in which the efficient outcome calls for the buyer to purchase one unit from each seller in each period. We show that when the buyer's valuations between periods are linked by switching costs and at least one seller is financially constrained, there are plausible conditions under which exclusion arises as the unique equilibrium outcome (the buyer buys both units from the same seller). The exclusionary equilibria are supported by price-quantity offers in which the excluding seller offeres its second unit at a price that is below its marginal cost of production. In some cases, the price of this second unit is negative. Our findings contribute to the literatures on exclusive dealing, bundling, and loyalty rebates/payments.
    Keywords: Exclusive dealing, bundling, market-share discounts, all-units discounts
    JEL: L13 L41 L42
    Date: 2007–05
  7. By: Pinar Akman (Centre for Competition Policy, University of East Anglia)
    Abstract: This paper examines the travaux preparatoires (prepatory documents) of Article 82EC which have so far been disregarded in the literature in order to find out the legislative intent of the provision. The legislative intent is important for understanding what Article 82EC currently is and aims at since its objectives have never been set out clearly by Community institutions. By using the travaux preparatoires the paper seeks to defy the common position that Article 82EC is based on 'ordoliberal' foundations. It shows that the drafters of Article 82EC were mainly concerned with increasing 'efficiency' and were not against accumulation of power per se. They did not intend to protect the competitors of dominant undertakings, but merely their customers. Thus, the provision was intended to apply to only 'exploitative' abuses and not 'exclusionary' abuses. Their main worry being 'increasing the size of the pie', their position on the objective of Article 82EC was closer to what one might today call 'total welfare' than 'consumer welfare'.
    Keywords: Abuse of a dominant position, legislative intent, travaux preparatoires, welfare, abuse, efficiency
    JEL: K21
    Date: 2007–03
  8. By: Chris Wilson (Department of Economics, University of Oxford); Catherine Waddams Price (Centre for Competition Policy, University of East Anglia)
    Abstract: This paper assesses the ability of consumers to choose between alternative suppliers. Across two independent datasets from the UK electricity market we find that consumers switching exclusively for price reasons appropriated only a quarter to half of the maximum gains available. While such behaviour can be explained by high search costs, the observation that 20-31% of the consumers actually reduced their surplus as a result of switching cannot. A brief analysis rejects an explanation involving suppliers' mis-selling tactics. Consumers may need direct protection, as well as good information, if their decisions are insufficiently accurate to engender competitive markets.
    Keywords: Search costs, switching costs, decision errors, mis-selling
    JEL: L00 D83
    Date: 2007–04
  9. By: Joshua S. Gans; David H. Hsu; Scott Stern
    Abstract: This paper considers the impact of the intellectual property (IP) system on the timing of cooperation/licensing by start-up technology entrepreneurs. If the market for technology licenses is efficient, the timing of licensing is independent of whether IP has already been granted. In contrast, the need to disclosure complementary (yet unprotected) knowledge, asymmetric information, or search costs may retard efficient technology transfer. In these cases, reductions in uncertainty surrounding the scope and extent of IP rights may facilitate trade in the market for ideas. We employ a dataset combining information about cooperative licensing and the timing of patent allowances (the administrative event when patent rights are clarified). While pre-allowance licensing does occur, the hazard rate for achieving a cooperative licensing agreement significantly increases after patent allowance. Moreover, the impact of the patent system depends on the strategic and institutional environment in which firms operate. Patent allowance seems to play a particularly important role for technologies with longer technology lifecycles or that lack alternative mechanisms such as copyright, reputation, or brokers. The findings suggest that imperfections in the market for ideas may be important, and that formal IP rights may facilitate gains from technological trade.
    JEL: L24 L26 O32 O34
    Date: 2007–07
  10. By: Sharon Novak; Scott Stern
    Abstract: This paper examines complementarity among vertical integration decisions in automobile product development. Though most research assumes that contracting choices are independent of each other, contracting complementarity arises when the returns to a single vertical integration decision are increasing in the level of vertical integration associated with other contracting choices. First, effective coordination may depend on the level of (non-contractible) effort on the part of each agent; contracting complementarity results if coordination efforts are interdependent and vertical integration facilitates a higher level of non-contractible effort. Second, effective coordination may require the disclosure of proprietary trade secrets, and the potential for expropriation by external suppliers may induce complementarity among vertical integration choices. We provide evidence for complementarity in product development contracting by taking advantage of a detailed dataset that includes the level of vertical integration and the contracting environment for individual automobile systems in the luxury automobile segment. Using an instrumental variables framework that distinguishes complementarity from unobserved firm-level factors, the evidence is consistent with the hypothesis that contracting complementarity is an important driver of vertical integration choices. The findings suggest that contracting complementarity may be particularly important when coordination is important to achieve but difficult to monitor.
    JEL: L24 L62 O32
    Date: 2007–07
  11. By: Thomas VALLEE (LEN - IAE Nantes); Murat YILDIZOGLU (GREThA)
    Abstract: Convergence to Nash equilibrium in Cournot oligopoly is a problem that recurrently arises as a subject of study in economics. The development of evolutionary game theory has provided an equilibrium concept more directly connected with adjustment dynamics and the evolutionary stability of the equilibria of the Cournot game has been studied by several articles. Several articles show that the Walrasian equilibrium is the stable evolutionary solution of the Cournot game. Vriend (2000) proposes to use genetic algorithm for studying learning dynamics in this game and obtains convergence to Cournot equilibrium with individual learning. We show in this article how social learning gives rise to Walras equilibrium and why, in a general setup, individual learning can effectively yield convergence to Cournot instead of Walras equilibrium. We illustrate these general results by computational experiments.
    Keywords: Cournot oligopoly; Learning; Evolution; Selection; Evolutionary stability; Nash equilibrium; Genetic algorithms
    JEL: L13 L20 D43 C63 C73
    Date: 2007
  12. By: Andreas Stephan (Centre for Competition Policy, University of East Anglia)
    Abstract: The paper reports on results from a public survey on attitudes to collusion and cartel enforcement in Britain. Respondents demonstrate an understanding that price-fixing is harmful and should be punished. While there is strong support for high corporate fines and naming and shaming, only 1 in 10 Britons think individuals responsible should be imprisoned. Weak perceptions of the severity of price-fixing are confirmed by only 6 in 10 people considering such practices to be dishonest. Sex and age stronly influence attitudes. Education and newspaper readership have less of an effect, indicating poor information dissemination. Only 20% would report their employer's involvement in price-fixing without guarantees of anonymity and/or a reward; 14% would not report at all for fear of consequences. Public opinion is divided as to whether leniency programmes are justifiable. Respondents consider public enforcement to be more important than compensating parties injured by cartels.
    Keywords: Cartels, public survey, enforcement, UK cartel offence, leniency, private enforcement, competition law
    JEL: L13 L42 K21 L41
    Date: 2007–05
  13. By: John K. Ashton (Centre for Competition Policy, University of East Anglia); Andrew Pressey (Norwich Business School, University of East Anglia)
    Abstract: This paper explores and quantifies the link between marketing and rulings on competition or antitrust law made by UK competition or antitrust authorities. This examination is timely due to both the changing form and increasing severity of competition law in the UK and the strong associations identified between marketing and antitrust law in the US literature. Through a comprehensive examination of past UK competition rulings from 1950-2005, the frequency and content of the principal forms of uncompetitive behaviour during the last half century are recorded. A high proportion of competition law violations are associated with the marketing function. UK competition authorities have viewed specific marketing practices and, more generally, the direction, scope and scale of marketing activity to be causes for concern. We conclude that marketers need to develop a greater awareness of competition law and contribute more to the ongoing discussion as to the present and future form of competition policy.
    Keywords: Marketing, marketing practices, competition law, antitrust law, anticompetitive behaviour
    JEL: M31 K21 L42
    Date: 2007–01
  14. By: Sällström, Susanna
    Abstract: Professional standards vary across professions and also change over time. One profession which has remained perfectionist is classical music, where the amount of practising is striking compared with other professions. Practising is a matter of increasing the reliability of ones skills rather than relying on a tool or a strike of genius to get it right. Once perfection has been achieved the individual will aim for higher quality since the effort is more likely to be worthwhile. Because the returns from perfection are higher the harder it is, the perfectionist equilibrium only arises in situations where genius is rare and reliability is low. As tools improve, even though perfection has become easier to achieve, professional standards may nonetheless decline. This mechanism is captured in an oligopoly model, where the failure rate and the quality are endogenously determined. It is shown that whilst individuals might be better off not playing a perfectionist equilibrium when reliability is low, welfare is higher in the perfectionist equilibrium than an enthusiastic equilibrium. Furthermore, when reliability is high individuals will play an enthusiastic equilibrium even though welfare and profits would be higher if they were perfectionists.
    Keywords: cultural economics; human capital; imperfect competition; learning; patent race; quality; skill; standards; technological change
    JEL: D2 D43 J24 L13 L15
    Date: 2007–07

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